Skip to main content

Full text of "Business organization and administration"

See other formats

IW*«l|i > t M l lW» W«s W I II M I I' M «'I H « I ) t^TI 






"" ■ m ill mmtmm 




Hem ^atk 

Hsitt a^alh^t of AgticttUutB 

l^t OJarnell UmnetBttH 
atljata, Kf. S. 


Cornell University 

The original of tliis book is in 
tlie Cornell University Library. 

There are no known copyright restrictions in 
the United States on the use of the text. 




Professor of Foreign Trade at New York University. 
Formerly Instructor at Stanford University, Adjunct 
Professor at the University of Texas, Professor at 
Ohio State University, Lecturer at Columbia Uni- 
versity, Professor at the University of Washington, 
Professor at the University of Rotterdam, Holland. 
Author of Foreign Trade and Shipping, etc. 






Made in the United States of America 



This book is written in the belief that there 
exists a need for a text which may form the basis 
of a short course iti the fundamentals of business 
administration and management and which will 
bring before the student those bigger business 
problems upon the proper solution of which success 
in business largely depends. 

In some schools such a course may supplement 
the work in book-keeping and office practice, 
while in others it may form an introduction to 
the more specialized and advanced courses in the 

Even a bare statement of the most essential 
facts of business practice is an ambitious under- 
taking. Much had to be omitted which might have 
been included. In fact, the most difficult task in 
the preparation of this volume was the elimination 
of material. 

It is hoped that in this process of trimming, 
nothing has been pruned away which is absolutely 
necessary to give the student a picture of the most 
common business situations. 

The references at the end of each chapter are 
not intended to present a complete list of books on 
any one subject. The limited resources of most 


libraries make it advisable to give only those books 
which are considered standard, and which are best 
suited to the needs of the kind of students for 
whom this book is intended. Teachers may also 
find these references an aid in planning their own 
collateral reading. 

As will be observed, the references given in con- 
nection with the "Questions for Further Study" 
are usually taken only from one or two of the 
references mentioned. This is done intentionally, 
so that these questions may be useful in schools 
where only a limited number of the most essential 
reference books can be obtained. 

Both sets of questions are to be taken merely as 
suggestions. They do not by any means exhaust the 
-possibilities. Many other and more vital questions 
will be brought out in the class discussion which must 
form an important element in the teaching of this 

The teacher's chief task will be to bring the ma- 
terial of the text in intimate relation with the busi- 
ness life of the community. This is no small task, but 
it would be difficult to find a field of study which 
offers the teacher a greater opportunity to draw upon 
the knowledge which the student has unconsciously 
acquired and to sharpen his powers of observation 
and analysis. 

A large amount of space has been devoted to the 
problems of labor management and to the payment 


of wages. These are at present our most vital indus- 
trial problems. Wrong prejudices are more likely to 
lead to disastrous results in the settlement of these 
problems than in any other business situation. 

If this little volume proves an aid to the teacher in 
awakening in the mind of the student a critical, 
analytical attitude toward his surroundings, it will 
not have been written in vain. 

J. Anton de Haas 

New York City. 



Chapter Page 

I. The Elements of Business Success ... i 

Knowledge — Scientific Attitude — ^Absolute Honesty — . 
Service — Social Sense — Human Sympathy — Character 
— ;Summary. 

II. Business Organization 13 

Modern Business Is Highly Specialized — The Two Larfee 
Classes of Business Enterprises — Industrial' Enter- 
prises — ^The Extractive Industries — Conserration of ^ 
Assets — Manufacturing Industries' — ^The Commercial 
Enterprises — ^The Relative Importance of These Enter- . 
prises — Efficiency a Social Duty — Business Analyzed 
According to Functions — Departmental Division: (i) , 
Purchasing (2) Service (3) Production (4) Selling 
(5) Accounting — Organization Charts — ^Summary. 

III. The Proprietorship of a Business ... 35 

The .Owners May Be One or Many — ^The Corporation — 
Advantages of Incorporation — ^Launching a Corpora- 
tion — ^The Value of Stock — Diflferent Classes of Stock — 
Preferred Stock. How It Arises — Different Kinds of 
Preferred Stock — ^The Control of the Corporation — ^The 
Payment of Stock — Transfer of Stock — Dividends — 

IV. Financing an Enterprise (Working Capi- 

tal) 54 

The Owned Capital of an Enterprise — Working Capital 
and Investment Capital — ^Factors Influencing Amount 
of Working Capital Needed. The Turnover — ^Seasonal 
Production Requires Large Working Capital — Borrow- 
ing Working Capital. Trade Credit — Borrowing from 
the Banks — ^The Promissory Notfe — ^The Security Back 
of the Loanf— Merchandise as Security for Loans — 
Bills of Exchange or Drafts — ^The Acceptance — ^The 
Credit System— The Note Broker— The Credit Man- 


Chapter Page 

V. Financing an Enterprise (Borrowing on 

Long Time) * 7^ 

Problems of Financing a Growing Business — ^Advan- 
tages of Borrowing on Long Time — Disadvantages of 
Borrowing on Long Time — Need for Security — ^The 
Mortgage — The Bond Issue — The Trust Company — 
Closed and Open Mortgages — Equipment Trust Bonds 
— Collateral Trust Bonds — The Income Bond — The 
Debenture Bond — The Life of Bonds — The Price of 
Bonds — The Repayment of Bonds — Summary. 

VI. Financial Institutions 91 

The Bank — The Commercial Banks — The Making of 
a Deposit — The Receiving Teller — The Individual 
Bookkeeper — The Paying Teller — The Note Teller — 
The Clearing House — Safety Deposit Department — 
Other Departments of a Commercial Bank^Loan 
and Trust Companies — Savings Banks — Insurance 
Companies — Reducing Uncertainty to Certainty — 
Insurance as a Business — Different Types of Insurance 
— Fire Insurance — Marine Insurance — Credit Insur- 
ance — Fidelity Insurance — The Stock Exchange — The 
Brokers — How Stocks and Bonds Are Sold — Summary. 

VII. Management 124 

The Problems of Management — The Manager as a 
Jack of All Trades — The Line Organization — ^The 
Duties of the Foreman — What Keeps the Men' at 
Work — The Problem of Securing Co-operation — The 
Planning — Lack of Accurate Knowledge Becomes Evi- 
dent^ — Scientific Management — ^T he Management 
Should Look After All Management Functions — 
The Human Factor — Motion Study — Rest Periods 
Must Be Planned — Other Considerations — Summary. 

VIII. The Wage Question 152 

What the Employer Buys — He Buys a Workingman's 
Time. The Day Wage — He Buys Output. The Piece 
Rate — Need for Accurate Information — Co-operation 
between Employers and Employees — He Buys Output 
and Time. The Task — Setting a Task — Summary of 


Chapter Page 

Wage Payments — The Demand for Standardized Con- 
ditions — The Group Bonus — Profit Sharing — The Wages 
of Store and Office Workers — Relation of Workman to 
Employer — Summary. 

IX. The Service Department 174 

What Is Included in the Service Department — The 
Employment Office — Labor Turnover — Labor Turnover 
an Expense — Hiring Men — Securing Applicants — Fil- 
ling Vacancies — Selecting the Workers — Vestibule 
Schools — Introducing the Employee to His Surround- 
ings — Record of Service — Investigation of Grievances 
— ^A Check on Labor Turnover — ^The Educational 
Office — ^The Suggestion Box — Health Department — 
Safety and Sanitation Department — Welfare Work — 

X. Selecting the Site . . > 202 

The Location of 'the Plant Demands Careful Study — 
Nearness to Raw Material — Nearness to Market — 
Available Labor Supply — ^The Power Factor — ^Associa- 
tion with Other Industries Is Beneficial — ^Transporta- 
tion — Whether to Locate in City or Country — Induce- 
ments Offered by Cities — Deciding upon the Site — 
Wholesale and Retail Locations — ^The Retail Store 
Location — Summary. 

XI. Planning the Building 223 

A Poor Building Means High Cost — ^The Factory Lay- 
out — The Various Types of Factories — The Assembling 
Industries — ^The Production Centers — Transportation 
in the Factory — Other Considerations — ^The Building 
Itself — Planning the Retail Store — ^The Retail Building 
— The Receiving and Shipping Rooms — Planning the 
Office — Summary. 

XII. Purchasing 244 

Careful Buying Is Essential to Successful Selling — ^Three 
Classes of Purchases — The Requisition — Checking the 
Quantity — The Stock Clerk's Duties — Collecting In- 
formation — Sending Out Requests for Quotations — 


Chapter Page 

What Determines the Placing of the Order — Following 
Up the Order — The Purchasing Agent as a Seller — 
The Retail Buyer — Determining the Demand — How- 
Buying Is Done — Supervising the Selling — ^The Pur- 
chasing Agent in the Retail Store — Summary. 

XIII. Marketing 266 

The Term Defined — The Marketing of Farm Products 
— ^The Local Buyer — Grading of Products — The Ex- 
changes — The Wheat Trade — Financing the Wheat 
Crop — ^The Cotton Market — The Marketing of Other 
Farm Products — ^The Marketing of Manufactured 
Products — The Various Middlemen Defined — Selling 
at Retail — ^The Department Store — The Chain Store — 
The Mail Order Business — ^Advantages and Disadvan- 
tages of Selling by Mail — ^The Manufacturer and the 
Market — Summary. 

XIV. Selling and Advertising 289 

Selling an Important Function — Manufacturer and 
Middleman May Co-operate in Selling— Advertising as 
an Aid in Selling — Advertising and Selling Compared — 
Attention — Interest — Meeting Argument s — Where 
Advertising Differs — ^Af tion — Knowledge of the Goods 
— Knowledge of the Buyer — ^The Advertiser Faces Pecu- 
liar Problems — ^Local Advertising — Price Maintenance 
— ^The Sales Organization — The Buyer — ^Summary. 

XV. Foreign Trade 316 

Foreign Trade Necessary — The Foreign Traders. Sell- 
ing Direct — Selling through Middlemen — It Is Neces- 
sary to Study the Market — The Tariffs Must Be 
Studied — Private Sources of Information — Banks Pro- 
mote Trade — Commercial Museums — Government 
Sources of Information — Miscellaneous Government 
Aid — Combination for Export Trade — Protection of 
Trade-Marks — ^Advertising in Foreign Markets — The 
Sample Fair — How Goods Are Quoted — Methods of 
Payment — Summary. 


Chapter Page 

XVI. The Technic of Foreign Trade 336 

Checking the Order — Preparing the Order — Procuring 
Freight Space — Marine Insurance — Invoicing the Ship- 
ment — The Boxes — The Dock Receipt — The Bill of 
Lading (B/L) — The Export Declaration — Other Docu- 
ments Required — Requirements of the Customs Author- 
ities — Disposition Made of These Documents — Notify- 
ing the Consignee — ^The Functional Middleman — 
Importing — Buying Methods — The United States Cus- 
toms — ^How the Appraisals Are Standardized — ^Sum- 




Knowledge. The first thing required for success in 
business is accurate knowledge of business affairs in 
general, and of the business in which one is engaged 
in particular. 

The old-time business man learned all that he 
knew about business by "doing." In the same way, 
the physician and the lawyer at one time prepared 
for their profession by reading in an office of an es- 
tablished practitioner and by assisting him in his 
cases. The training which these professional men 
received in this way was very inadequate as com- 
pared with the training students now receive in our 
medical and law colleges. 

The practitioners had poor laboratory equipment, 
could devote but a portion of their time to the giving 
of instruction, their own preparation was not any 
too thorough, their experience limited, and their 
teaching ability questionable. This Inefficient method 
of training for the professions has been universally 
abandoned. The business man, however, must still 
to a large degree depend on the old-fashioned "ap- 
prentice" method of training. 


Only recently have the schools and universities in 
the United States undertaken to teach the essentials 
of business. Their neglect in this respect has led 
many corporations, industries, banks, foreign trade 
concerns, and wholesale and retail stores, to establish 
their own schools. This is unsatisfactory, for it re- 
sults in an unnecessary duplication of equipment and 
personnel, placing, thereby, a heavy burden upon 

The need for better trained men and women in 
business has become daily more and more apparent 
to the business man. The high prices of raw material 
and labor make it more urgent than ever that the 
entire staff be well trained. Lack of knowledge of 
methods and processes, lack of training in the keep- 
ing of correct records, or in the management of 
finances, in fact, every lack of knowledge means les- 
sened efficiency, high cost, smaller profits, and pos- 
sible failure. 

The impression that prevails in many places that 
"nerve" will make one's way is entirely erroneous. 
To be sure, a certain amount of aggressiveness is 
needed to press to the front, but a position thus 
achieved cannot be held unless the "nerve" be backed 
up by ability and knowledge. 

Scientific Attitude. In order to make one's knowl- 
edge truly useful it is necessary to cultivate what 
may be called the "scientific attitude of mind." This 
means the attitude towards life of one who desires to 


know the actual facts and is not satisfied with opin- 
ions or offhand guesses. 

There is a premium in active life upon arriving at 
decisions quickly and without loss of time. But fre- 
quently conclusions which are the result of careful 
investigation lead to wiser actions. The scientific 
mind does not jump at conclusions, its methods may 
arouse impatience with those who are accustomed to 
trusting to intuition, but the days of the "rule of 
thumb" methods are numbered. More and more 
careful, deliberate action based upon carefully ac- 
cumulated knowledge is taking the place of quick, 
snap-judgment, and hair-trigger action. 

To take an example in the accounting field. Many 
business men fail to keep good accounting records and 
are remiss in the keeping of cost records, and still 
there is no other way in which accurate knowledge of 
the condition of a business can be obtained. 

The lack of good records lies at the bottom of much 
reckless price cutting. Many retailers are actually 
selling goods at a loss from ignorance in regard to the 
cost of doing business. The recent interest of busi- 
ness men in "uniform accounting," i. e., standardized 
sets of accounts, is in part the result of the hope that 
competing firms may, by their adoption, gain a better 
knowledge of costs. Price cutting which is not based 
upon accurate cost data results in injury to all firms 
dealing in the same line. 


William C. Redfield, in The New Industrial Day 
(p. 185), gives an interesting illustration of the igno- 
rance of many business men of important aspects of 
their own business: . 

Into the office of a large factory in New York State 
went one day a competitor of the concern who thought 
it courteous to call upon his rival. He was cordially 
received by the unassuming owner and finding the 
atmosphere congenial, began to talk on matters of 
mutual interest. Being asked whether he had not se- 
cured a certain order, he answered in the affirmative, 
saying that that work was a specialty with him and that 
he had been able to reduce the cost for material and 
labor to about eighteen cents each piece. His host said 
that he had not himself given any special study to that 
particular article, and that he was very glad to have 

When the visitor left, the owner crossed the room to 
his cost-keeper whose eye he had seen twinkling, and 
asked him what the last lot of these goods cost for labor 
and material, and was told six cents each. The trouble 
with the visitor was that he had no realizing sense of his 
own heavy burden charges, and, ignoring them and 
forgetting selling cost, he had underbid the man whose 
actual outlay was but one-third his own. This is but 
one of many possible illustrations showing that the man 
who "knows his own business" is often ill-informed about 
important factors in it. 

In every field of business activity there is found 
the man who is not satisfied until he knows, until he 


has discovered, the one best way of reaching his goal, 
and also the man who is satisfied to trust to his bluflf 
to carry him through, and is willing to follow the 
rut of precedent. The latter may score an occasional 
spectacular success; the former builds more slowly 
for a certain future. 

Science is merely an orderly system of collecting 
information. It is impossible to gather information 
which will be really useful until the problem is first 
carefully analyzed and taken to pieces so that the 
essentials may be separated from the non-essentials. 
This, therefore, is the first step in all scientific work. 
First comes an analysis of the problem. The next 
step is to gather information which is lacking. In 
gathering this information, great care must be exer- 
cised that hearsay and opinion are not taken for 
accurate facts. Where no facts are available, enough 
"opinions" should be gathered to make it possible to 
discover in how far these opinions are likely to be 
correct, and in how far they are merely based upon 

The next step is to arrange this information — to 
tabulate it so that it is possible to arrive at a conclu- 
sion. A wastebasket full of facts is meaningless. 
They should be arranged so that all those which 
point in one direction are brought together and are 
offset by those which seem to point to a different 
solution, very much in the same way as accounting 
records give a systematic and understandable expo- 


sition of a large variety of facts which otherwise 
would be meaningless. In the interpretation of these 
facts, the business man will find ample opportunity 
to use all his knowledge and experience. To sum up 
the whole matter in simple language, the scientific 
method as applied to business means: 

1. Determine just what it is you want to do. 

2. Collect all possible infornriation. Make certain that 

you collect facts, not opinions. 

3. Determine on the basis of this information which is 

the best way to proceed. 

4. Then go ahead. 

5. Keep careful records to make it possible to check 

constantly the results obtained, for in no other 
way can the efficiency of different methods be 

Absolute Honesty. After all, there is a streak of 
dishonesty in the man who depends on his "nerve" or 
"bluff." He is parading unjder false colors; is assum- 
ing a knowledge which he does not possess. In deal- 
ing with customers, such a man will "never admit that 
he does not know, even in cases where it would be to 
the interest of the customer to be frank. He is 
afraid to throw off the mask which he has chosen to 

Honesty is the backbone of business; without it 
no bank can exist; and the retailer depends upon the 
honesty of his customers as much as they depend 
upon his. 


If sinyone doubts whether the world is getting 
better, let him study the history of business relations. 
The modem business mam is honest cmd knows that 
his success depends not upon his being able to squeeze 
the last penny out of any transaction, but upon the 
degree to which he serves. Service, dependable ser- 
vice, and absolute honesty, constitute the foundation 
of all business success. The large firms that supply 
the nation and many customers in foreign lands with 
trade-marked goods are evidences .of the supreme de- 
mand for honesty. A trade-mark is a promise to 
maintain quality which, if broken, means failure. 
If any proof were needed that the dictates of our 
conscience, which prompts us to deal justly and 
fairly with all men, reveal to us the moral law ac- 
cording to which the world is governed, business 
experience can furnish that proof. Honesty pays in 
a business sense because honesty is a fundamental 
need in human relations. It pays to observe it for 
the same reason that it pays to observe the law of 
gravity. Such laws cannot 'be ignored without dis- 
astrous results. 

Service. The introduction of the concept of service 
m business has given all transactions a different as- 
pect. The retailer no longer looks upon the customer 
as legitimate prey to be exploited to the limit; he 
considers how he may best please this stranger so 
that their relations may be peimanent. The old 


dealer would say, "A sale is a sale," and would not 
encourage his dissatisfied customers to register their 
complaints and to return the goods that displeased 
them. The modern concern says, "If not satisfied, 
tell us." No sale is successful in the eyes of the 
modem business man which does not pave the way 
for future sales. 

In order to instill this spirit into the minds of all 
who are connected with the enterprise, the same 
spirit of honesty and fair dealing should prevail in 
the internal relations of the business. 

Social Sense. The business man should have a 
social sense. He should feel that he is performing a 
social service and that he has social duties. As a 
dealer, h^ should be instrumental in building and 
strengthening ethical standards in the relations be- 
tween himself and his competitors, and between the 
business men and the general public. As an employer 
he should consider himself responsible to society for 
the treatment he gives his working people, for the 
wages he pays them, and for their health and general 

A business concern which ruins the health of its 
workers, which turns them out into the world broken 
in body and spirit, which arouses through its unfair 
dealings a spirit of revolt and unrest — such a concern 
is a social menace. From the point of view of society 
it were better if such a concern did not exist.^ The 
benefits which society derives from its existence can 


never compensate for the burdens which it throws 
upon society. 

Human Sympathy. A keen appreciation of social 
responsibiUty should go hand-in-hand with a sympa- 
thetic understanding of man and his problems. 

It is impossible to conceive of a business man who 
deals only with "things." All business is based upon 
a relation of man to man in which the goods are but 
an incident. In the factory or the mine, the physical 
equipment, the raw material, and the finished product 
are important. But success is not determined by 
them, but primarily by the spirit of those who work 
among them. 

A fine factory building, a well-equipped shop, an 
attractive-looking store building, do not make a suc- 
cessful business, any more than a few buildings, how- 
ever well equipped, make a school or a university. 
And just as it is the faculty and the relation between 
the faculty and the students which make a school, 
even if there is no building at all, according to the 
same principle, it is the men and women, and the 
relation between the managers and the workers in 
an organization which determine its success. 

The ability to awaken in others a desire to co- 
operate, a realization of a community of interest Is a 
rare quality which is worth more from a business 
standpoint than the ability to design clever machines 
or to keep books accurately; for the ability to handle 
human problems is rarer than the ability to handle 


material problems. May not this be the reason why 
an executive and a salesman usually receive a higher 
salary than the man who designs or makes the article? 

This may not seem just to the one who produces 
the product. To him the product is the principal 
thing. Without it, so he says, there would be no 
salesman and no executive. The producer, the work- 
er, the designer, therefore, believes himself the most 
essential. But he forgets that the matter may well 
be turned around. If there were no salesmen there 
would be no call for the product. If there were no 
executives there might be no factory organization. 
A group of machines, a mob of workers, and a pile 
of raw material do not make a factory. It requires 
the personality of a true executive to make out of 
this complex a productive unit. It requires accurate 
knowledge of processes and of machines, of market 
demands and of costs. But most of all, it requires 
that understanding of the motives of men, that 
ability to see life from their point of view without 
which it is impossible to establish a successful 

The day is past when labor was classed along with 
raw material and equipment as something bought and 
paid for, and the control of which entailed no 
special responsibility. We are now beginning to 
regard the employer as directly responsible to society 
for the moral and physical welfare of the human 
beings who place themselves under his control. 


The success of a business man will, in the future, 
no longer be measured solely by the amount of money 
he has succeeded in accumulating, but will also be 
measured by the mark he has left upon the lives of 
those with whom he has come in contact. 

Character. Business success, therefore, in the fu- 
ture more even than in the past, will be built upon 
character. Honesty with oneself and with others, 
a demand for the truth about business facts, a 
sympathetic and fair attitude toward one's asso- 
ciates, a sense of responsibility for one's actions — these 
are the prerequisites of success. 

Summary. Success in business is impossible with- 
outknowledge of business in general, and of the kind of 
business in which one is engaged in particular. This 
may be acquired by the "apprenticeship" method, or, 
and this is more economical in time and money, by a 
preliminary school training. This will shorten the 
period of apprenticeship. One should cultivate the 
"scientific attitude of mind"; business men are 
beginning to realize this. Honesty, more than ever, is 
a business asset — ^honesty in dealing with competitors, 
customers, -employees, and with oneself. Service 
expresses the true ideal of business; it is based on 
social sense and human sympathy. 



W. C. Redfield. The New Industrial Day. The Century- 


I. What is meant by the scientific spirit in manage- 

Reference: Redfield, Chapter VIII. 
. 2. What are the benefits which a business man may 
derive from a complete knowledge of costs? 
Reference: Redfield, Chapters IV, V. 
3. What opportunities are open for the study of 
business in your community? in your state? 


1 . Outline the steps by means of which a business man 
should reach his conclusions. 

2. Explain what is meant by service in business, and 
contrast this new spirit with the attitude that used to 
prevail. Give an example of some actual experience you 
have had which illustrates the new and the old spirit. 

3. What qualities should a man possess in order to 
become a leader among men? 




Modern Business Is Highly Specialized. When 
someone says that he is "in business," this statement 
does not convey a very definite picture of what 
his actual occupation is. All that we know is that he 
evidently does not belong to the professions; he 
does not teach, preach, plead cases, or fill teeth; 
that much we know, but we do not know what he 
does do. He may sell peanuts, write advertisements, 
manufacture hats, or build houses. 

In this textbook we shall study business in its 
various aspects. Before we enter upon that study it 
is necessary that we begin by considering somewhat 
carefully what we mean by business. Studying the 
anatomy of a worm does not give anyone a knowledge 
of zoology. Not until other animals have also been 
studied and the relation among them has been 
pointed out, does a detailed study of any one of them 
have any meaning. 

It is the same with the study of business. First, 
we must get a bird's-eye view of the various kinds of 
business enterprises and their relation to each other, 
before we can derive any benefit from a detailed 
study of any one of them. The best method to 


follow in finding one's way in a strange city is 
to study the map carefully before venturing out. 
The present chapter will draw a picture of the 
business world which will serve as a map to those 
who desire to find their way in the business world. 

The Two Large Classes of Business Enterprises. All 
business enterprises may be divided into two large 
classes. First, there are those which produce raw 
material or change its form, possibly combining it 
with other raw material, and in that way producing a 
finished product. Such enterprises are called indus- 
trial enterprises. The second is a group of business 
activities which do not change the form of the 
products, but are instrumental in passing them from 
hand to hand and from place to place until they 
finally reach the consumer. These are called com- 
mercial enterprises. 

This division into two large groups is based upon a 
fundamental distinction. An industry changes the 
physical form of the goods; a commercial enterprise 
does not, though it may sometimes bring minor 
changes in the packing and finishing of the goods. 

Industrial Enterprises. The industrial enterprises 
may again be subdivided into two main groups: 
the extractive industries, and the manufacturing 
industries. The extractive industries include min- 
ing, forestry, agriculture, and fisheries. They 
produce the raw materials which are used by the 
manufacturing industries. These extractive indus- 


tries, from a business point of view, present interest- 
ing problems, quite different from those connected 
with manufacturing industries. 

In later chapters we shall study the various factors 
which refer to plant location; why it is better to 
locate a manufacturing plant in one place rather 
than another. The fact that it is necessary to study 
this question shows that there is in the matter of 
location, room for the exercising of judgment. 

The Extractive Industries. One may locate a steel 
plant in Seattle, Pittsburgh, or Philadelphia ; a furni- 
ture factory in Grand Rapids, or San Francisco ; but 
no such possibility of choice exists in an extractive 
industry. In order to exploit a mine, to lumber a 
forest, or to work a farm, one must go where the 
mine, the forest, or the farm is. The natural resource 
to be worked predetermines the location of the extrac- 
tive industry based upon it. This is not, however, 
the only distinctive feature of this type of enterprise. 

To a varying degree, these industries are based on 
wasting assets; the larger their scale of production, 
the more quickly they put themselves out of business. 
In a mine the amount of ore is fixed ; every ounce of 
ore removed is removed once for all, and the mine 
becomes poorer by that amount. A forest lumbered 
according to the old-fashioned American method is 
transformed into a barren waste from which, if 
situated on a hillside, all good soil is washed away 
in a few years, rendering it even unsuited to farming. 


Every foot of lumber removed leaves the country 
that much poorer. 

To a certain extent this is true of farming. Many 
sections of the country, renowned at one time for their 
fertility and great productiveness, are now yielding 
small crops. The cotton and tobacco fields of the 
South are not as good as they once were. 

The fishery industry faces a similar problem. 
The destruction of the spawning grounds, coupled 
with the excessive yearly catch, are rapidly dimi- 
nishing the fabulously rich fishery resources of 
both the Atlantic and Pacific coasts. 

Conservation of Assets. Well managed, extractive 
industries take measures to offset the effects of this 
decrease in assets. In the mining industry such 
measures take the form of development and explora- 
tion. As the old mine gradually nears the point of 
exhaustion, new veins may be opened up on the same 
claim, or some other claim in another part of the 
country may be prepared for production. Such 
measures perpetuate the industry as a business 
undertaking, but cajinot do away with the fact that 
physical exhaustion is inevitable. 

Forestry, agriculture, and fisheriesare in asomewhat 
different position since they deal with the products 
of the vegetable and animal kingdom which, if 
properly cared for, will replenish themselves. 

By a scientific policy of reforestation, forests may 
be made to yield lumber, not once, but indefinitely. 


The commercial forests of England, France, Norway, 
and Germany, are eloquent examples of this. The 
wonderful forests of our great Northwest are rapidly 
being destroyed. Bjire hills with blackened stumps 
like so many crosses in a cemetery, mark the path of 
the lumber mills that work their way further and 
further into the mountains impoverishing the coun- 
try.^ A reforestation policy rigjdly enforced upon all 
owners of timber lands would make these forests 
permement sources of wealth to the nation. 

The farming industry may also take measures by 
means of which its permanent asset, land, may notonly 
be prevented from diminishing in productivity, but 
may actually be improved. By raising the same 
crops year after year land soon becomes exhausted. 
Crop rotation, a combination of dairy or chicken 
farming with the raising of crops, and the proper use 
of fertilizers are all means of increasing the fertility of 
the soil. The farms of England, Holland, and Bel- 
gium, though cultivated for centuries, are constantly 
increasing their yield per acre. The farms of the 
United States are on the whole decreasing their yield. 
The reason lies in the ignorance of the American 
farmers of the proper methods of soil conservation. 

Better care of our rivers, scientific propagation of 
fish in Federal and State hatcheries, and^- rigidly 
enforced fishing laws may save the fish resources of 
this country from destruction. These matters are of 
national concern and it is, therefore, logical that the 


private ownership of such resources and the use that 
is made of them should be rigidly controlled by the 

One other element enters in to distinguish the 
extractive industries. Their operation is always 
subject to heavy risks. A mine may give out 
suddenly; a forest fire may destroy millions of dollars 
worth of timber; storms may raise havoc with the 
big trees; a drought may destroy all chances for a 
good crop no matter how carefully planted and 
cultivated; or a swarm of locusts may clear a field 
ready to be harvested. 

These uncertainties make such industries the 
basis of much speculation. "Get-rich-quick" schemes 
are usually associated with mines, while speculation 
in food products is one of the most objectionable 
kinds of gambling. The lumber industry is not 
entirely free from such speculation and fortunes have 
been made and lost in the industry. 

Manufacturing Industries. Manufacturing indus- 
tries take the raw materials obtained from the 
extractive industries and fashion them into finished 
articles. Such industries require a building and more 
or less elaborate tools and machinery. They use, 
on the whole, a different class of labor from the 
extractive industries. These latter need a large 
number of unskilled laborers of whom no other 
qualification is asked than physical strength. A 
manufacturing concern needs as a rule a large num- 


ber of highly skilled and intelligent workmen. 
Extractive industries draw to themselves an army 
of foreign laborers, many of them unmarried and 
constantly shifting from one job to another. The 
manufacturing plants appeal more to the man with a 
family, who is willing to stay in one place. 

This condition is emphasized by the fact that the 
extractive industries are to a large extent seasonal. 
They are very active one part of the year and close 
down during other seasons. This seasonal fluctua- 
tion increases the cost of doing business and makes it 
necessary when borrowing money to borrow for 
long periods from season to season. It also aggra- 
vates the labor question since it forces the workmen 
to adjust themselves to intermittent work. Cities 
near mining or lumber camps, or selected as the 
winter homes of fishermen are notorious for their 
social instability and for the rough and restless labor 

Many manufacturing enterprises are also subject 
to seasonal fluctuations. The clothing trade and the 
ice and coal trade are of this nature. Driven by the 
desire to make complete use of the plant throughout 
the year and to secure a stable, reliable labor supply, 
many of the seasonal business enterprises are more 
and more eliminating their seasonal character. They 
do this by a wise advertising and selling policy, by 
co-operation with their customers and with their 
competitors. They n^y reach the same results by 


developing a foreign demand for their goods, or they 
may undertake to produce two types of products 
subject to dovetailing demands. The ice business 
may for that reason be profitably combined with the 
coal business. 

The Commercial Enterprises. Many business 
undertakings of widely different nature may all be 
spoken of as commercial enterprises, for they are 
engaged in facilitating the flow of products from 
maker to consumer. These enterprises fall into three 
large classes: (i) marketing or trading, (2) trans- 
portation, and (3) financial enterprises. 

Those of the first group buy products from a 
producer to sell them again to some other producer 
or middleman, or directly to the consumer; or 
they may act merely as agents for the producers and 
sell on a commission basis. To this group belong 
the brokers dealing in produce, lumber, and metals, 
and also the wholesalers, jobbers, and retailers. 

The transportation group consists of such business 
concerns as railroads, interurban and urban electric 
roads, and inland and ocean transportation com- 

Financial enterprises include banks, trust com- 
panies, stock exchanges, brokerage firms, and insur- 
ance companies. The functions of the last two 
groups are easily distinguished. Transportation 
supplies the means of carrying goods from one place 
to another, whether from mine to factory or from 


factory to wholesaler or retailer, or from retailer to 
consumer. The financial enterprises, on the other 
hand, supply in part at least, the funds needed to 
enable the various persons to buy the goods they 
need, either for consumption or ior production. 

The Relative Importance of These Enterprises. 
Which one of these various enterprises is the most 
important? They are all essential. Man cannot get 
along without food ; neither can he get along without 
shelter; nor can he raise his food without tools. 

The manufacturing industries, though producing 
many luxuries, have made the making of a living 
easier by supplying man with more efficient tools. 
Transportation facilities carrying goods from place 
to place, allow the entire world to share in the 
products of the most favored spots. The products of 
the tropics are found in the remotest comers of the. 
globe, while the manufactured products, the lumber, 
and the wheat of the temperate zones are common 
necessities in tropical lands. 

Without the aid of the various traders such wide 
distribution of goods would not be possible. The 
middlemen, so often accused of all the evils in the 
dictionary, perform a necessary service. The retailer 
who keeps within convenient distance from every 
home a well-selected stock of goods, contributes no 
little to the comforts of life. Who, indeed, would 
care to return to frontier conditions when once a 
year the supplies for the family were bought and 


stored away? All these enterprises are, therefore, 
essential and socially valuable, but only so long as 
they are conducted efficiently and honestly. 

Efficiency a Social Duty. From a purely selfish 
standpoint, middlemen may look upon an increase 
of their number in the path that connects producer 
and consumer, as a good thing. It means great 
profits. From the point of view of society at large, " 
an unnecessary multiplication of middlemen is bad ; 
for all inefficiency is a social loss. If more men are 
engaged in loading a ship, in cutting down a tree, in 
selling groceries, or in directing the money resources 
of the community than are absolutely necessary, 
the total productivity of society is, by that much, 
less than its maximum. Ultimately every member of 
society suffers by inefficiency, for if many men 
are engaged unproductively, there are just as many 
mouths to feed, just as many human wants to 
satisfy, but less goods to go around than when the 
same men are engaged in productive work. 

This consideration may change somewhat our at- 
titude toward the successful business man. The 
small, inefficient business man is frequently looked 
upon with sympathy as entitled to our aid and sup- 
port, while the big, successful man is at times 
thought to have made his income at the expense of 
society. Frequently, however, the situation is quite 
the reverse. The poor business man — or, as the 
economist would call him, "the marginal man" — is 


the culprit. His inefficiency means an increased cost 
to everybody concerned and an increased profit to 
the efficient. The poor business man throws bur- 
dens upon the banks and the insurance companies; 
he is frequently responsible for congested freight ter- 
minals and for labor unrest. The instability of his 
business endangers all other business in the same way 
as a bad fire risk endangers all other buildings in the 
same block. 

Efficiency in business, therefore, is a matter, not of" 
purely individual interest, but of social concern. The 
greater the efficiency of the link connecting nature 
and consumer, the more human wants may be satis- 
fied with the same work and capital. 

In the pages that follow, various factors affecting 
the efficiency of business enterprises will be discussed. 
The discussion will frequently be technical and de- 
tailed, for no useful information can ever be im- 
parted in mere generalities. However much the 
question under discussion may seem to be of impor- 
tance only to the pocketbook of the individual 
business man, it should at all times be remembered 
that individual efficiency and productivity are of 
direct and intimate concern to society as a whole. 
The consumer is as much interested In the installa- 
tion of good accounting systems as the business man 
and his employees, while a lower selling or transpor- 
tation cost is of equal importance to producer, 
middleman, and consumer. There is, therefore. 


nothing dismal or materialistic in a study of business 
problems. It is, in fact, a study of the practical 
means of increasing human happiness. 

Business Analyzed According to Functions. We 
have discussed the various business enterprises and 
grouped them according to types. Within each of 
these types many men are at work in charge of a 
large variety of fimctions. There is a great similarity 
between the functions necessary to operate widely 
differing types of enterprises. In the first place, a 
line may be drawn between ownership and operation. 
In a more primitive organization of society, these 
functions were combined in one man, and a business 
was operated by its owner with the aid of clerks and 
workmen. As the business unit grew, it became 
necessary to look for funds outside. Many people 
who have surplus funds are willing to use them pro- 
ductively, but frequently cannot spare the time or 
do not possess the ability to actively engage in the 
operation of the concern themselves. 

The growth of the corporate type of organization 
has made it possible for anyone with funds to invest 
in many business enterprises. But this investment 
does not carry with it the burden of operation. In 
modem business, ownership and operation are, there- 
fore, quite distinct. The owners exercise direct con- 
trol over the finances of the enterprise and direct the 
general policy, but the operation is placed in the 
hands of a different group of persons. 


In this group we may recognize three large sub- 
divisions: management, administration, and labor. 
The functions of the management are to plan all 
processes of operation and to direct the execution of 
the plan. The labor force, whether in the office or 
the shop, receives the instructions and orders from 
the managers and is expected to carry them out. 
The administrative force acts as a link between the 
managers and the shop or office; first, in making a 
record of the orders issued; second, in keeping a rec- 
ord of results ; and third, by tabulating this informa- 
tion in accounting or statistical form for the use of 
the managers. 

In few business concerns are management, admin- 
istration, and execution as sharply separated as the 
foregoing description might indicate. There is, how- 
ever, a general tendency throughout the business 
world to carry through this fundamental division 
more clearly than formerly. 

Departmental Division. Still another subdivision 
usually takes place according to the various depart- 
m'ents of -activity which jointly constitute the "opera- 
tion" of the enterprise. In the manufacturing busi- 
ness this subdivision would logically result in the 
following departments: 

I . Purchasing. Here is concentrated the buying of raw 
material; partly finished goods and parts; supplies for 
the shop, such as oil arid waste; supplies for the office, 
such as typewriter ribbons, paper, glue, and paper clips; 


equipment, such as machinery, office fixtures, and small 

2. Service. This department hires the workmen, 
selects them, assigns them to their jobs, trains them for 
their work, supervises their efficiency, and transfers 
them to other work if this proves desirable. It cares for 
the comfort and physical and spiritual welfare of the 

3. Production. In this department the product is 
made. Usually this department is subdivided into at 
least the following subdepartments : engineering or 
drafting department; and the shop with its many 
subdivisions such as storerooms of raw material, finished 
stock rooms, tool rooms, power plant, and the shop proper. 

4. Selling. This again may be subdivided into: ad- 
vertising, selling, correspondence, delivery, and other 

5. Accounting. Here the records are kept of the fi- 
nancial relations of the firm with the outside world and 
with its own employees, and records from which the 
cost of production of the goods and the efficiency of 
various departments and persons may be determined. 

Organization Charts. The human mind has diffi- 
culty in grasping abstract statements. For this rea- 
son, more and more general use is made in business 
of charts and graphs. There is usually connected 
with the accounting department a department 
charged with the duty of collecting data regarding 
operation and administration, and of presenting 
them in such a form that the conclusions to which 


they point may be quickly grasped. This is called 
the statistical department. One of its functions is to 
present monthly, weekly, or even daily charts, show- 
ing in pictures the facts of intere^ to the different 
managers or executives. To give an example: In 
case the manager for whom the graph is being pre- 
pared is primarily interested in selling, many such 
pictures may be drawn ; one to show the total "sales 
of the department day by day; another to show the 
daily records of individual salesmen ; and another to 
give the relation between certain advertisements and 
the sales that took place as a result. So each depart- 
ment gives rise to many such data which may form 
the material for graphical representation. To illus- 
trate how much more easy it is to grasp a pipture 
than to understand figures, compare the following: 





S ^ 

Production during the week ending June 25th of 

No. A 3 spools 

M T W Th F S 

606 575 585 310 450 610 


From the above chart it is immediately clear that 
something happened on Thursday, possibly a break- 
down at the end of the day. 

This statistical department is also charged with 
the duty of preparing organization charts. These 
charts have several purposes. They show in a clear 
picture the departments of which the organization 
consists, their functions, their interrelations, and the 
flow of authority. In many large concerns such 
charts are kept either on the walls of all offices or 
under a glass plate upon the desks of executives and 
departmental managers. Two such organization 
charts are given below. 

Besides satisfying the purposes Indicated below, 
such .charts may also be a source of inspiration to the 
younger members of the organization. They see the 
steps by which they may climb into the better posi- 
tions. One good way to attain success is to prepare 
oneself constantly for the "job ahead." No matter 
how far we progress in life, there is always some better 
position ahead. By preparing conscientiously for the 
position, the day's work seems more worth while ; it 
becomes a stepping-stone to something better. Our 
widened horizon makes us see our position as the man 
above is seeing us. 

Many large industrial corporations make it a 
definite policy to require of each man that he train 
some other employee to be his "understudy." This 
accomplishes a variety of beneficial results. The 















a u 
" 5 




younger man realizes that he Is in line for promotion 
and this encourages him and gives him enthusiasm 
in his work. The higher employee no longer feels 
himself indispensable and begins to look to the job 
ahead of him. Enthusiasm and alertness in this way 
communicate themselves to the entire organization. 
Moreover, should some employee resign or fall sick 
there would be no difficulty in filling his place. . The 
National Cash Register Company attributes a large 
part of Its esprit de corps to this policy of training 
understudies. In order to aid employees in obtaining 
this vision, some firms prepare promotion charts, 
showing In a simple way the steps by which It is 
possible to climb to higher positions. 

Lord and Taylor, a large department store In New 
York City, has prepared the following chart: 




|W0RK roomI I STOCK 1 I orncE ciaLI 

— 1 I r- 



In the pages that follow the questions hinted at in 
the present chapter will be discussed in more detail. 
.Summary. There are two classes of business en- 
terprises, industrial and commercial. The Industrial 
enterprises change the form of goods, while the com- 
mercial enterprises facilitate exchange and produc- 


tion. Industrial enterprises may again be divided 
into manufacturing and extractive industries, each 
with its own characteristics. Commercial enter- 
prises may be trading, transportation, or financial 

Within each business three main functions may be 
recognized : management, administration, and labor. 
The following departmental divisions are frequently 
found: purchasing, service, production, selling, and 
accounting. Organization charts are used to enable 
the members of the organization to understand their 
relation to the organization as a whole. 



H. C. Adams. Description of Industry. Henry Holt and 

C. C. Parsons. Business Administration. A. W. Shaw 

J. R. Smith. Industrial and Cdmmercial Geography. 
Henry Holt and Company. 


1 . What does Smith mean when he says : "Civilization 
is a product of adversity"? 

Reference: Smith. Chapter I. 

2. Explain the difference between "money crops" and 
"supply crops." 

Reference: Smith. Chapter H, 

3. Show by examples how the application of science 
to agriculture has changed methods and crops. 

Reference: Smith. Chapter XVH. 

4. What is the position of an auditor, and in how far 
do his duties differ from those of a controller? 

Reference: Parsons. Business Administration. 
Chapter H. 

5. In what respects does the classification of industries 
given by Adams differ from the one given in this chapter? 

Reference: Adams. Chapter H. 

6. What, according to Adams, are the marks of a 
successful industrial organization? 

Reference: Adams. Chapter VH. 



1. Give a definition of extractive industry, manu- 
facturing industry, commercial enterprise. Give two 
examples of each type of enterprise. 

2. What problems of labor and financial management 
are characteristic of the extractive industries? 

3. Are these problems entirely absent from the manu- 
facturing industries and the commercial enterprises? 

4. Explain why individual efficiency is a social du^j^. 




The Owners May Be One or Many. Where a man 
owns his business, as a great many of the small busi- 
ness men do, we speak of "single ownership," or "sole 
proprietorship." A few of the large and nationally 
known concerns are also of this type. John Wana- 
maker continued to be the sole proprietor and mana- 
ger of his large department stores until a few years 
ago, when he changed the form of ownership. 

The advantage of this kind of ownership is that 
the owner receives all the profits which are made, but 
this is offset by the consideration that he must also 
bear all losses. Legally, he is responsible with all that 
he possesses — whether invested in his business or not 
— for all debts contracted, either private or on ac- 
count of his business. Another drawback of sole 
proprietorship is that the growth of the business is 
often limited by the amount which the owner is able 
to invest. Except where the business prospers to an 
' unusual degree, and where the owner is willing to 
leave a large portion of these profits in the business — 
thereby increasing his investment year by year — 
single proprietorship may seriously hamper growth. 
At best, reinvesting earnings is a slow proeess 


and may often be too slow to allow normal develop- 
ment to take place. 

In order to obtain additional capital so that the 
enterprise may expand, the proprietor may take in 
one or more partners. The basis upon which he will 
take in these coproprietors will depend upon the 
agreement he is willing to make. A contract will be 
drawn up in which the amount which each is to in- 
vest in tiie partnership, the form of this investment, 
whether cash, goods, or good will, the way in which 
profits and losses are to be divided, are carefully 
stated. Usually there is also a clause dealing in detail 
with the exact method according to which the part- 
nership may be dissolved. It is easy to see that 
taking in partners is a serious business which should 
not be done without careful consideration. All part- 
ners, except those who have been declared "dormant" 
or "non-acting," have a right to control the affairs of 
the concern, and are legally empowered to bind the 
partnership by their contracts. 

In selecting partners it is, therefore, necessary to 
find not only someone with the necessary amount of 
cash, but also someone who commands the entire 
confidence of the owner. It is bad enough to be held 
responsible with all that one possesses for debts con- 
tracted in the pursuit of one's business, as in the 
single proprietorship, but it is worse to be held re- 
sponsible for the debts contracted for the under- 
taking by all other partners. This "unlimited liabil- 


ity" is a serious drawback to the partnership. An- 
other objection is that death or insanity or even vol- 
untary withdrawal may disband the partnership, 
thereby leaving the original owner high and dry, 
frequently unable to carry on his business alone and 
unable to find another partner. Where & large 
amount of capital is needed, a correspondingly large 
number of partners would have to be taken in, 
thereby increasing the dangers and difficulties men? 

The Corporation. The corporation presents itself 
as a forni of ownership which has all the advantages 
of a partnership, and few of its disadvantages. A 
partnership is a contract between persons, but this 
personal element disappears in the corporation, 
which is an artificial person created by law. In most 
states, corporations may be created under the "gen- 
eral corporation law" of the state by fulfilling the 
requirements of the law and by filing the necessary 
papers with the propfer state officials, usually the 
Secretary of State. If all conditions have been ful- 
filled, a "charter" or "articles of incorporation" are 

The capital of a corporation, corresponding to the 
net investment of the single partnership or proprie- 
torship, is once for all fixed and cannot be changed 
without sanction from the sam'e state officials. For the 
sake of convenience, the total capital is divided into 
shares of equal amounts. These are called shares or 


shares of stock. Those who contribute to the capi- 
tal are called stockholders or shareholders. The 
stockholders are, therefore, the owners of a corpora- 
tion in the same sense as partners are the owners of a 

In most states at least three incorporators are re- 
quired before a corporation can be formed. They 
must have agreed to take a certain percentage of the 
total, capital stock — this is called subscribing to the 
stock — and before business can be begun a certain 
percentage of their subscription must be paid into 
the treasury of the company. In applying for incor- 
poration the following information must, as a rule, 
be submitted : 
I.- The name and purpose of the organization. 

2. The amount of capital and classes of stock tobeissued. 

3. The location of the main business office. 

4. The expected life of the corporation — as a rule a cor- 

poration has perpetual life. 

5. The names and addresses of the incorporators. 

Advantages of Incorporation. One of the principal 
advantages of the corporation is found in the limited 
liability of its shareholders. Usually their liability is 
limited to the amount which they have invested, 
though in rare cases, as in the case of banks, "double 
liability," i. e., liability for twice that amount is 
found. This limited liability feature is one of the 
reasons why state regulation is needed. The inter- 
ests of the creditors must be given some degree of 


protection, though it may curtail the freedom of ac- 
tion on the part of the owners. 

The fact that such corporations may have a per- 
petual Ufe, and that their existence is not affected by 
changes in the body of owners is another important 
advantage over the partnership, the life of which is 
always more or less uncertain. The stockholders or 
shareholders, though dividing the ownership of the 
undertaking, have no right to act as agents for the 
corporation unless duly appointed to such office. 
This protects against recklessness or lack of business 
knowledge on the part of a joint owner, a danger 
which is very real in the case of a partnership. 

All that a stockholder is expected to do is to supply 
funds, to cast his vote at the stockholders' meetings, 
and to take the profits, if any, while in case of loss he 
knows that he cannot lose more than he invested. A 
corporation may, therefore, look for its shareholders 
among people of all kinds ; the possession of a certain 
amount of cash is the only necessary condition of 
membership. The fact that losses are limited to a 
known amount makes the finding of persons able and 
willing to become part owners of a new enterprise 
comparatively easy. 

To sum up the advantages of incorporation — they 
are found principally in: S 

1. Limited liability. 

2. Separation of ownership and management. 

3. Life independent of changes of ownership. 


Launching a Corporation. Until the incorporation 
is completed the incorporators are "jointly and sev- 
erally" liable for all debts contracted by them for the 
undertaking. A considerable amount of business 
may have to be transacted before incorporation can 
be started. It may be necessary to pay down money 
to secure patent rights or mining claims or to secure 
options for later purchases. Lawyers may have- to 
be engaged to advise in respect to legal complications 
which are likely to arise in connection with such 
ownership and rights. These and a multitude of 
other details must be attended to before it is possible 
to incorporate. 

It is not an easy matter, therefore, to launch a cor- 
poration. Few people know how to go about it, and 
still fewer are willing to face the risks involved. The 
making of all preparations and the finding of the 
initial finances is called promotion, and the men un- 
dertaking it are called promoters. Some individuals, 
usually men with experience in finance and a knowl- 
edge of the financial world, make a specialty of pro- 
motion. They are professional promoters. Some of 
these promoters have incorporated their business and 
have added a staff of engineers. By so doing they 
are able to give expert advice concerning the feasi- 
bility of engineering projects, and to undertake the 
construction and initial operation of such propositions. 

Sometimes a group of bankers forms a syndicate, 
which is a kind of temporary partnership for the pur- 


pose of investigating, organizing, and starting a new 
corporate enterprise. The promoters are usually re- 
warded by being made shareholders of the new cor- 
poration. In other words, they are given a block of 
stock or are allowed to purchase it at a low figure. 

The Value of Stock. Each stock- or shareholder 
receives as evidence of his part ownership a stock cer- 
tificate. In this stock certificate is stated the number 
of shares of stock which it represents. The par value 
of the stock is also indicated. By par value is meant 
the sum which represents the proportionate amount 
of the total capital which the share represents. If 
the total capitalization is $100,000 and one thousand 
shares have been issued, then each share is said to 
have a par value of $100. Whether it is worth $100 is 
another question. The value of the shares is deter- 
mined not by their par value, but by the actual or 
expected earnings of the corporation and by the pro- 
portion of these earnings which will fall to each 
share. The larger the number of owners, the smaller 
the share which each one will receive. 

Different Classes of Stock. There is still another 
factor which influences the value of shares of stock. 
Each share of stock has three important rights. 
These are : 

1 . A vote in the election of the directors of the company. 

2. A share in such part of the profits as the directors 

have declared can safely be distributed. 


3. A share of the total net assets of the corporation in 
case of dissolution. 

As long as all shares are on the same basis and none 
have special rights, all shares of stock will have the 
same value, but sometimes there exist different kinds 
of stock. Certain shares have privileges and rights 
which are not given to the ordinary or common stock. 
Stock with special privileges is called preferred stock. 

Preferred Stock. How It Arises. Why should such 
special privileges be given? Because under certain 
circumstances this may be the only way of saving the 
company from ruin. Suppose that a company has 
been operating for some time and is desperately in 
need of more capital. It is found impossible to 
"float," i. e., sell more common stock. The directors 
do not judge it expedient to borrow money for the 
undertaking, for that would mean shouldering a 
heavy responsibility for the regular payment of in- 
terest. Preferred stock opens the way to meet this 
difficult situation. It means taking in more co- 
owners, and it means granting them rights which the 
original owners do not possess. It means a sacrifice 
of rights on the part of the original owners, but it is 
a necessary sacrifice. Money must be secured and 
cannot be secured in any other way. 

Or it may be that the company has borrowed 
money in the past and has difficulty in meeting its 
obligations. The creditors may have been given 


rights when the debt was contracted, which might 
make it uncomfortable for the company. This is 
usually the case where bonds have been issued. These 
will be discussed in a later chapter, but at this place 
it may be explained that bondholders are long-time 
creditors of a company who usually have the right to 
take possession of the property and to operate it for 
their benefit, or to sell it and to apply the proceeds on 
the debt, whenever the comp?my fails to pay either 
interest or principal at the agreed time. Should the 
company fail to live up to its obligations, the bond- 
holders may take steps to exert their rights. 

In such cases preferred stock forms a compromise. 
The original owners sacrifice rights and the old bond- 
holders sacrifice some of their rights to become privi- 
leged part-owners rather than wreck the concern by 
insisting upon exercising their full legal rights. Pre- 
ferred stock may also arise as a result of the desire to 
give old part-owners, who have invested different 
amounts in cash an equal voting power in the man- 
agement of the corporation. 

Different Kinds of Preferred Stock. Almost all pre- 
ferred stock is preferred as to dividends, i. e., in re- 
spect to the profits to be divided. There is an almost 
unlimited number of ways in which this special privi- 
lege may be granted. The agreement may be that 
no dividends are to be paid to the common until the 
preferred has received a certain amount, say 6 per 
cent, after which all may share equally or in some 


other way agreed upon. As an example may be given 
the preferred stock of the Chicago and Northwestern 
Railway. This stock draws 7 per cent which is fol- 
lowed by 7 per cent on the common. After this the 
preferred draws another 3 per cent before the com- 
mon draws anything further. 

In some cases preferred stock is cumulative; this 
means that a minimum of yeasly dividends is guar- 
[anteed. If during any one year no dividends are 
paid, they must be paid at some later time before 
the common stockholders can receive any share in 
the profits. This may be an agreeable arrangement 
for the preferred stockholders, but it is easy to see 
how this affects the common stockholders. They 
may have to go without income for years and years. 
As far as they are concerned this arrangement is al- 
most, though not quite, as bad as borrowing money 
and facing the heavy yearly interest burden. 

The situation grows worse when preferred stock- 
holders are granted additional voting privileges. 
This is frequently the case, and it is not uncommon 
for the control of the corporation to pass practically 
into the hands of the preferred stockholders. Some- 
times provision is made by which control passes into 
their hands automatically,' as soon as dividends have 
not been paid for a certain number of years, say four 
or five years, in succession. 

Preferred stock may also have special rights in re- 
spect to the final division of the property in case of 


dissolution or — and this is becoming more and more 
common — an additional inducement may be held out 
in the privilege of exchanging the preferred for com- 
mon stock, in which case a share of preferred may be 
considered the equivalent of one and a half or even 
two shares of common. 

The Control of the Corporation. All stocks have, as 
a rule, the right of vote in the stockholders' meeting. 
All internal affairs are usually regulated by a set of 
by-laws which supplements a charter or constitution. 
In these by-laws the following matters are included : 

1. Time, place, and manner of calling and conducting 

stockholders' meetings. 

2. The number of stockholders which constitutes a 


3. The manner in which absent stockholders may cast 

their votes. This is called voting by proxy. 

4. The method of electing directors, their duties, and 


5. The method of appointing the officers, their duties, 

and qualifications. 

6. The salaries and other methods of compensation of 

directors and officers. 

The stockholders elect a board of directors. The 
duties of the directors are to appoint competent 
officers, to direct the general policy of the corpora- 
tion, and to examine the periodic statements sub- 
mitted to them in order to inform themselves in 
regard to the honesty and efficiency of the managers. 


In this country, directors are seldom paid for their 
services except by a nominal fee for expenses. In 
other countries directors receive a percentage of the 
profits and they are, therefore, more vitally interested 
in the success of the concern even though they may 
hold only small amounts of stock. 

The only way in which a stockholder can control 
the management of an undertaking of which he is a 
part-owner, is by casting his vote in a general stock- 
holders' meeting for those directors who, he believes, 
will best look after his interests. But one stock- 
holder can do very little unless he has a very large 
amount of stock, and even then he can do very little 
unless in some way he succeeds in getting a majority 
vote in the meeting. This does not necessarily mean 
51 per cent of the total shares issued; much less than 
that is sufficient as a rule, for the stock is frequently 
held by widely scattered owners who never even con- 
sider attending a meeting. And even if they did 
attend, the fact that they do not "pull together" 
makes it possible for any small and well-organized 
group with a comparatively small amount of stock to 

Frequently a group of financiers control the vote 
not only by means of their own holdings, but also by 
means of the proxies of absent voters. A proxy is a 
document by means of which the stockholder author- 
izes someone else to vote for him. 


The Payment of Stock. As will be remembered, the 
stockholders who agreed to buy stock when the com- 
pany was first started were said to subscribe to this 
stock and are consequently called subscribers. 

Since the company is not permitted by law to begin 
operation before at least a certain percentage of the 
amount subscribed has been paid in, the stockholders 
must make this initial payment before the concern 
begins to be a "going concern." 

The board of directors may decide — if the by-laws 
do not compel them to follow a certain course — ^how 
much money the stockholders shall pay, and whether 
this sum shall be paid at once or in regular or 
"called" installments. Stock paid for at one time or 
paid in regular installments is full-paid stock. When 
only a partial payment has been made the remainder 
continues to be an obligation on the part of the 
stockholder. Such stock is called assessable stock. 
The element of uncertainty connected with this type 
of stock does not make it very popular. When one 
buys such stock one never knows whether he is buy- 
ing a source of income or a debt. A corporation will, 
therefore, as much as possible issue only stock which 
is full-paid. 

Where only a partial cash payment is received the 
difference is frequently made up by a transfer of 
property, tangible or intangible, such as patent 
rights or "services." It is clear that in such a case 
the difference between the par value of the stock and 


the actual cash payment constitutes the supposed 
value of the services or of the property transferred. 
The board of directors or the promoting syndicate 
determines these values. If their estimates are far 
above the actual value, then the par value of the 
issued stock and consequently of the authorized capi- 
tal is in excess of the actual value of the assets both 
tangible and intangible. Such a condition is called 
overcapitalization and the stock thus issued is called 
watered stock. This may or may not be a bad thing. 
Frequently an overcapitalization is fully justified by 
the advantages resulting from incorporation, such as 
more favorable credit and better management. 

Transfer of Stock. The original owners do not al- 
ways care to continue to invest their money in the 
corporation, and may wish to sell their ownership 
rights to others. This they do by selling their stock 
certificates. Since each one of these stock certificates 
bears the name of the original owner and the certifi- 
cate is, moreover, recorded in his name on the books 
of the company, it is necessary that he formally re- 
linquish his right. This he does by placing his name 
on the back of the certificate, in other words, by in- 
dorsing the document. This is called indorsement in 
blank because the name of the new owner has not 
yet been inserted. Such a certificate may now pass 
from hand to hand and not until the time comes 
when dividends are to be paid is the name inserted 
of the person, who at that time is the owner. The 


certificate is then sent to the transfer agent of the 
corporation, who will make the transfer on the books 
and will issue a new certificate. 

It is important that this transfer take place in 
proper time, for dividend checks are mailed to the 
persons whom the books show as owners of the stock. 
In order to prevent the issuing of more certificates 
than are authorized, a registrar is appointed who 
checks the certificates issued by the transfer agent. 

Dividends. After the net income for the year has 
been determined by the accountants, the directors 
decide how it shall be spent. They may decide to 
divide it among" the stockholders or to retain all or 
a part of it in the business. Since the capital of the 
corporation has once for all been determined in its 
articles of incorporation, this addition to the per- 
manent investment must appear under another head- 
ing on the balance sheet. The account which almost 
invariably receives this charge is surplus. It is cus- 
tomary never to use this surplus for the payment of 
dividends, though there is no legal reason why it 
should not be so used in the future. 

By not receiving the dividends during any one year 
the stockholders suffer a loss in income, although this 
loss is offset by the increase in value of the corpora- 
tion's assets. Where the body of stockholders is 
fairly constant the benefit fully ofifsets the sacrifice, 
but in the case where the body of stockholders is con- 
stantly changing, the financial interests of the present 


group of owners are sacrificed, while some future 
group will reap the results. The stockholders may 
disapprove, but they have no way of forcing the direc- 
tors to pay them a defiinite part of the profits made. 
The declaring of any dividend is entirely at the op- 
tion of the directors. 

As a rule the directors will try to maintain a steady 
rate of dividend. Their act of withholding a portion 
of the net income may be merely the result of that 
ideal. Stocks with a fairly uniform rate of dividend 
find a more ready market and prepare the way for 
other issues of securities by the same company. It is 
usually unwise to pay out all the profits made in a 
year of exceptional prosperity. Careful financial 
management should be wide awake to possible hard 
times to come, especially in industrial concerns, which 
as a rule are subject to great fluctuations. A portion 
of the profits laid aside in times of prosperity may 
aid the company to face the dangers of a temporary 
slackening of business. A company may be seri- 
ously troubled through a neglect of this principle. 

As a rule dividends are paid in cash. In order to 
have sufficient cash available at the right time the 
company must take proper measures to convert 
enough assets into cash in advance of declaring divi- 
dends. Where this is neglected it may become 
necessary to borrow money to pay dividends. 

It may not always be wise to pay dividends in cash. 
There may be reasons for hiding the actual profits 


made from the general public. A withdrawal of cash 
may seem unwarranted, especially where a large ac- 
cumulation of surplus has taken place. In such cases 
stock dividends may be paid. This means that the 
stockholders are presented with one or more shares 
of additional stock. It will usually be necessary to 
increase the capitalization in order to accomplish 
this. This means capitalizing the surplus, a legiti- 
mate act as long as the surplus has resulted from 
actual earnings and not from the marking up of 

The stockholders' position is not thereby improved. 
Whether one owns shares with a face value of $200 
out of a total capitalization of $100,000, or $400 
worth out of a capital of $200,000 makes no differ- 
ence. In either case one is entitled to 1/500 of the 
total profits. The principal advantage is derived 
from the fact that the market price of each share of 
stock has become less and that it is, therefore, more 
readily sold. 

Summary. The proprietorship of a business may 
be in the hands of one person or of many. In the 
latter case, the business may be organized as a part- 
nership or as a corporation. The advantages of the 
corporation are limited liability, perpetual life, sepa- 
ration of management and ownership. Frequently 
corporations are organized by promoters. Evidences 
of ownership are called shares of stock ; the corpora- 
tion issues certificates which are recorded by a regis- 


trar and a transfer agent. There are many different 
kinds of stocks. They may be divided into two large 
classes : common and preferred. Preferred stock may 
be preferred as to dividends, voting rights, or assets. 
The payment of dividends is in the hands of the 
board of directors. 


L. H. Haney. Business Organization and Combination. 

The Macmillan Company. 
T.L.Greene. Corporation Finance. G.P.Putnam's Sons. 
E. S. Mead. Corporation Finance. D. Appleton and 

W. H. Lough. Business Finance. The Ronald Press 



1. It is said that stockholders in the United States 
are largely ignored in matters of management by the 
directors of the corporations. Can you discover a reason 
why this condition is not found to the same extent else- 

Reference: Lough. Part I, Chapter IIL 

2. What is the purpose of a voting trust? 
Reference: Lough. Part II, Chapter V. 

3. What are some of the effects of lack of care in the 
declaring of dividends? 

Reference: Lough. Part IV. Chapter XIX. 

4. Describe in detail the operation of an underwriting 

Reference: Lough. Part III, Chapter XV. 



1. What are the advantages of the corporate organi- 

2. What is meant by the terms par value, cumulative 
preferred, proxy, subscription? ^ 

3. How is a corporation controlled? 

4. How is stocfe transferred? 

5. What are the advantages of regular dividends? 

6. What is a stock dividend? 



(Working Capital) 

The Owned Capital of an Enterprise. As we have 
■seen in the preceding chapter, a business may be 
•owned singly or by a group of owners who form a 
partnership, a joint stock company, or a corporation. 
These owners supply the necessary funds with which 
to launch the enterprise. 

The first decision which the owners face is how the 
money shall be spent. They must buy land, build- 
ings, possibly machinery and tools, and they must 
invest in raw material, labor, and fuel. It is no easy 
matter to decide how much should be allowed for 
•each purpose. Many concerns are doomed to failure 
from the very outset on account of an unwise decision 
of this important question. There is a great tempta- 
tion to buy a fine building and the very best and most 
•expensive machinery, in a belief that this means 
"starting out right." As a matter of fact, it may mean 
the very opposite. 

Working Capital and Investment Capital. Many 
farmers are said to be land poor. By this is meant 
that they are landowners and, therefore, not poor in 
the ordinary sense of the word, but th^t they are poor 


in that they have no ready cash — no working fund. 
When they are called upon to pay wages or to buy 
necessities they must borrow from others. 

Many a business concern is in somewhat the same 
condition. A large proportion of the funds or capital 
of the enterprise is tied up in buildings, machinery, 
and more or less permanent equipment; and little is 
left to operate the enterprise, and to carry on enough 
business to keep the capital investment working at 
full time. Business failures frequently result frorq. this 
mistake in the distribution of the available funds. 

When starting a business undertaking two ques- 
tions must, therefore, be studied. 'The first question 
is how much money is needed to start the enterprise, 
and the second question, of equal importance, is how 
shall these funds be divided between capital investmenf 
and working capital? Only experience can determine 
how much working capital is needed in a business.. 
Certain fundamental principles may be recognized. 

Factors Influencing Amount of Working Capital 
Needed. The Turnover. One of the most important 
factors in determining the amount of working capital 
needed is the rapidity of the turnover. By turnover is. 
meant the number of times the stock is sold out and 
replenished. If a store has on hand goods, 
valued at $100,000, that is to say, valued at sales. 
price, and the total sales of the store amount to- 
$300,000 a year, then it is said that this store turns 
over its stock three times a year. By investing; 


$100,000 in goods the store has done a business of 
$300,000. Another store, with a less rapid turnover, 
in order to do a $300,000 business must tie up more 
than $100,000. Take, for example, a concern which 
turns its goods over twice a year instead of three 
times. This will necessitate a constant investment in 
stock of $150,000. Hence, it is plain that in order to 
carry on the same volume of sales the second store 
needs more working capital. 

This same situation exists in a factory. Here it is 
the rapidity with which the goods are sold out of the 
warehouse which determines the amount of money 
tied up in stock. But still another factor enters in. 
The stock which must be kept on hand to fill orders 
promptly is one factor, the length of the manufactur- 
ing process is another. The more time is consumed 
in that process the more "goods in process" are on 
hand at any one time in the factory. These, too, 
represent investment. The raw material which must 
be kept in stock is still another factor. If the factory 
is forced to import its raw material in large quantities 
from foreign countries the raw material investment 
may be very considerable. When, on the other hand, 
the factory is placed near a source of material so 
that any needs may be quickly filled and hardly any 
raw material need be carried in store, then the invest- 
ment in raw material becomes negligible. In a fac- 
tory the amount of funds tied up in stock is, there- 
fore, determined by the rate of turnover of finished 


goods, the raw material stores, and by the length of 
the manufacturing process. 

''Seasonal Production Requires Large Working Capi- 
tal. Whenever anything interferes with the regular 
turnover of a business, stock will accumulate and tie 
down a large share of the ready funds. Seasonal in- 
dustries such as tiie straw hat industry and the 
clothing industries, must manufacture their goods 
months in advance in order to have them in the re- 
quired quantity when the summer demand comes. 
This means that the working capital is, to a very 
large degree, tied up in finished goods. The amount 
of business the concern can do ^t the time the tem- 
porary demand is active is limited beforehand by 
the amount of capital the concern has been able to 
invest in finished goods during the manufacturing 
months of the slack season. If firms always paid 
cash for their purchases of raw materials and other 
necessary goods, such seasonal industries would re- 
quire huge amoimts of working capital. A firm does 
not necessarily supply all of its working capital. 

Borrowing Working Capital, Trade Credit. It is 
not always necessary to pay cash for goods. It is 
possible to postpone payment or, as it is called, to 
buy on credit. By this method a business may be 
carried on with comparatively little actual working 
capital. Retailers buy their goods in this way from 
the wholesaler or manufacturer, and are allowed to 
postpone their payment long enough, so that they 


frequently sell the goods to the consumer before 
payment is due. They can then use the money they 
received from their customers to pay the wholesaler 
or manufacturer. 

Manufacturers may in this way buy their raw 
material, or partly finished goods, and wholesalers 
may again make similar terms with manufacturers. 
This buying on credit is most frequently found in the 
retail trade, and here principally among the small 
concerns, while the manufacturer uses this method 
of raising funds but very little. There is a good 
reason for this. Although by this method a business 
may get along with little working capital, the firm 
which allows the postponement of payment does not 
grant this privilege for nothing. 

The price of goods sold on credit is always higher 
than that of goods sold for cash. This needs no ex- 
planation for it is clear that the firm selling on credit 
is really lending its working capital to its customers. 
The more a firm is compelled to sell on credit and the 
longer the period of credit that must be allowed, the 
more working capital that firm will need, and the 
-higher is its cost of doing business. It is, therefore, 
fair that the buyer should pay for the privilege of re- 
ceiving credit. When in ordinary business transac- 
tions goods are sold for, say, $i,ooo and 5 per cent 
off for cash within ten days, and the custom of the 
trade is that credit shall run no longer than two 
months, then it means that the business firm is pay- 


ing a very high rate of interest for the credit accom- 
modation. The choice lies between a cash payment of 
$950 at the end of ten days or a $i,ooo payment fifty 
days later. For the fifty days use of $950 the buyer 

pays $50 or the equivalent of 37.89 per cent a year^ 
Whenever the buyer is able to find some cheaper 
way of obtaining temporary use of funds other than 
this commercial credit, it will pay him to make use 
of it. For this reason large department stores and 
well-established manufacturing fin^s, who can bor- 
row money readily and at a moderate rate, find it to^ 
their advantage to pay cash for their purchases aud- 
io borrow money in some other way. 

Borrowing from the Banks. One method of securing 
cash with which to pay for purchases is to borrow 
from the banks. The banks are always on the look- 
out for safe investments in which to place their sur- 
plus funds, but they must be Careful in the choice of 
their investments. The principle that should always 
be borne in mind when investing the funds of a com- 
mercial bank is that in order to be able to meet de- 
mand obligations one must invest only in liquid 
loans, A liquid loan is a loan which has only a com- 
paratively short time to run and which is self- 
liquidating. This last feature is quite as important 
as the first. A loan is self-liquidating if the funds are 
spent in such a way that the transaction itself, pro- 
viding everything goes as anticipated, will produce 
the means of its own payment. 


Take an example : If a man borrows, with the de- 
sire to buy an automobile, that loan cannot be called 
a liquidating loan, for the possession of the machine 
does not increase his power to repay the sum bor- 
rowed. As a matter of fact, the cost of the gasoline, 
tires, and repairs may place him financially in a less 
favorable position than before the purchase. But let 
him invest the same amount in a delivery wagon for 
his store and the situation is different. Now he can 
please his customers by quick delivery, he may be 
able to do away with two or possibly three horse and 
wagon outfits, or he may be able to expand his busi- 
ness in another section of town. The delivery equip- 
ment increases his earning capacity. This is a self- 
liquidating investment. It earns money to pay for 

In order to make certain that the funds of the bank 
are invested in the right kind of loans, the banker 
will request from the prospective borrower a state- 
ment of hiri business and of the purpose for which the 
loan is to be used. A model of such a statement as 
prepared by the Federal Reserve Board is attached 
opposite this page and should be studied carefully. 
If properly filled out such a statement gives a clear 
picture of the financial condition of the firm in 

The Promissory Note. After the banker has studied 
this statement and has been convinced from conver- 
sation with the borrower that the purpose for which 



statement of. 
Business. . . . . . 


.Bank op. 

We make the foUowine statement of all the assets and liabilities of our firm at the close 

. of trasiness on. and give othet material Information 

tor the purpose of obtaining advances on notes and bi*ls bearing our signature or indorse- 
ment, and for obtaining credit generally on present and future applications. 




N Qtes Pa va ble to Banks . 
Notes Payable to Others 

Notes Receivable 

Other Quick Assets (Item- 

Other Current Liabilities 

— ™ 

— ■ 

Current Liabilities . 

- — 

Other Deferred Liabili- 


Current and Deferred 

Liahilittes . 

Net Worth 




Contingent Liability. As indorse 

t $ 

Finished $ Unfinished 

If any goo^s are on coi 
amount and circumstances 

$ Raw 5. .. 

isignment, state 

As guarantor $ No accounts have 

been sold or assigned except as follows'. . . . 

Sales and Profits Last Fiscal Year. Net Sales 

Accounts and Notes Receivable, If any past 
due or doubtful state amount and circum- 

were at maximum ($ ) 

on r • ■ • ■ and at a minimum 

{$ ' ) on 

If any amounts are due from n 
firm, employees, branches or s 
state amounts and circumstan 

lembers of the 
milar sources, 

of mortgages and on what assets a hen 

Is mortgage a lien on any current 


and if readily salable at value stated 


Reserves and Depreciation. State what pro- 

:::::::::::: 1 

vision is made 



>r of firms. . .1 

We hereby certify that the foregoing figures are taken from the books of our firm and 
that they and the statements contained on both sides of this sheet are true and give a cbr* 
/ect showing of our financial condition. 

Firm Name 

Signed this. 

.day of .191- 



Member of Firm 
Federal Reserve Bank of New York Statement Form 



Date op Partnership Date of Expiration. 

Generai. Partners | 

Special Partners 










If the 6rm has any branch offices state location and how accounts are handled. 

If the firm or any member is connected with any other business, state nature of the busi- 
ness and extent tc which interested 

What is the practice of the firm in regard to trade discounts?. 

Are books audited by a certified public accountant? 

Give date of last audit 

Location and Description 
of Land Owned 


Assessed at 

Mtgd. for 

Insured for 

Titte- The legal and equitable title to all pieces of above described real estate is solely 
In the name or names of one or more of the members of the firm, except as follows 

(The balance of this space may be used for printing any questions desired to be asked 
amplifying statement of condition as shown on opposite page) 

the loan is to be spent is sound, he will consent to the 
loan. Before the money is handed over to the bor- 
rower he must prepare an evidence of his debt which 
is to be left with the bank until redeemed. This evi- 
dence will usually take the form of a promissory note. 
The form of such a note is simple. No stated form 
is required. It is necessary, however, that it contain 
the name of the person to whom the payment is to 
be made, the date when the payment is due, the 
amount of the payment, the date when the contract 


was made, and that it is signed by the person making 
the promise to pay. When any of these features are 
absent the note is not complete and there may be 
doubt as to its legality. (See model below.) 

$ __.__ Pato Alio, California, . 

On . after date, for value received, 1, we, or either or us, promise to pay Go 

ordeTof- . - . - i- 



with InicTMKclehi pet c«^l.p«innum ,- ■ - _ ln«.«t «v.bU quinnlv, .nd tatCT« tlid prindml n« 

•pmul >t miiuritv to dr.w «ght pet «tit. .tttiu.! ItitetMt.both pHtwip.! .titl Ititcmt piydjle Iti United Sieiei gold eoln. TTie tn«ket% entJonete 

■ttd guatmloti of thu note SBTee to p.y ■ teawneble '■ '" " l.™..*.. k...nn .^ h,„U, »u.n>L1u nrsmtiTienc erf d.v- 

mene, notice of iwrn-pevment. ptoteit end i — • — ~' -- 
titne oF pivmeni me. be e.iei\ded wiiKoul 
•hole iuin to beeomc dtie etid payebl^ 

Due . 


As a rule there is included in the note a statement 
in regard to the interest to be paid on the money 
thus obtained. 

Such a promissory note may be single-name paper, 
which is the case when one signature appears on a 
note, or it may be a joint note, in which case two or 
more signatures appear. A joint note may be two,- 
three-, or four-name paper, according to the number 
of signatures. 

In order to make a note negotiable or transferable, 
it is necessary to add to the name of the one who is to 
receive the money the words "or order," or "or 
bearer"; this makes it possible for the creditor to 
transfer his right to some other person. This trans- 


fer takes place through indorsement, and may be ac- 
complished by affixing the signature of the payee on 
the back of the document. This is called a general 
indorsement to distinguish it from a specific indorse- 
ment, which names the person to whom the payment 
is to be made. 

The Security Back of the Loan. In the case of the 
notes just described, the only security which the 
bank has is the honesty of those who signed the note. 
The banker may know these men and may have con- 
fidence in them ; he may be certain that the borrower 
and his friends may be perfectly willing to pay when 
the note falls due, but the question is whether the 
borrower will be able to pay. A loan is, then, only 
safe when the borrower combines ability with willing- 
ness to pay. 

There is nothing in the ordinary promissory note 
that gives any information about this ability to pay, 
nor any certainty in regard to the way in which the 
money is to be spent. The banker may, therefore, 
ask some additional security. This security is called 
collateral. A very common method is to deposit with 
the bank a. security of bonds, stocks, or other valu- 
able documents acceptable to the bank. These must 
be properly indorsed or made, as it is called good de- 
livery, for unless so indorsed the bank could not sell 
them as the need arose. 

Many merchants offer their accounts receivable as 
security for loans. An account receivable is an ac- 


count upon the books of the borrowing firm which 
shows that a certain amount of money is due from 
another concern. This method is becoming quite 
general. In a way it is efficient and safe, but it may 
give rise to fraud for it is possible for a business man 
to assign his accounts receivable to one bank and 
then to use these same accounts as a basis for direct 
loans from some other bank. 

Another method to obtain ready money is to bor- 
row money on merchandise. Manufacturers fre- 
quently place their raw material in warehouses and 
borrow money from banks and give the warehouse 
receipts as security. The amount which the banks 
are willing to lend will be determined by the charac- 
ter of the merchandise. Only merchandise for which 
there is a steady and fairly constant market can be 
made the basis of loans, while perishable goods form 
very dangerous security. 

Banks never lend up to the total value of the mer- 
chandise, they hardly ever lend more than about 
80 per cent, and usually less. 

Merchandise as Security for Loans. It is not neces- 
sary to keep the merchandise stored away in a ware- 
house while it is being used as collateral. Goods may 
move freely from one part of the country to another, 
or even to foreign countries, and may change hemds 
several times, financed all the while, not by those 
who deal in the goods, but by banks. 


Agricultural products travel that way from farmer 
to domestic or foreign buyer. The farmer usually 
needs and demands cash for his product. He hcis in 
all probability accumulated a large bill with his local 
grocery and dry goods stores during the period be- 
tween harvests, and he may also have to pay for his 
farm machinery which he bought eeirlier in the year 
on credit. He needs the meams of payment, there- 
fore. He demands cash or a deposit in his favor 
with a bank against which he can draw checks. The 
traveling buyers have only a limited amount of cash 
at their disposal. They may be able to pay cash for 
the crops of one or two farmers, but if they had no 
other way of obtaining cash they would have to wait 
with further purchases until the crops had been 
moved to some central market like St. Louis, Chi- 
cago, or Kansas City, and sold to the middlemen 
who form the link between these large primary 
markets and the consumers. 

The local buyer is able to borrow from the bank 
by the following process : he draws a bill of exchange 
or draft on the commission men or wholesaler at the 
primary market to whom the products are consigned. 

Bills of Exchange or Drafts. A draft is an order to 
pay a specified amount of money to a specified person 
at a definite time. 

This order to pay is worth money and the banks 
are willing to buy it. Since the money is not due 
immediately but only after a certain period of time, 


and since a certain amount of risk is also involved in 
the transaction, the banks will charge a fee for this 
service. .This fee is deducted in advance, so that a 
draft of, say, $i,ooo which is due three months later 
may not bring much more than $985. The difference 
between the face value of the draft and the amount 
actually received, in this case $15, is called discount. 
Discount is calculated like interest on the basis of a 
certain percentage a year. In the example the dis- 
count charged was 6 per cent. 

The security back of this draft may be merely the 
reputation of the firm on which it is drawn. Fre- 
quently the merchandise which forms the basis of 
the transaction is given as a collateral. The banks 
do not receive the goods themselves, but instead a 
receipt of the railroad company, called a bill of lading 
or waybill, which is evidence that a certain quantity 
of grain or cotton or some other kind of product has 
been shipped. The railroad company will only make 
delivery of the goods against return of this bill of 
lading. The bank receiving this document is, there- 
fore, certain that the goods will not be released with- 
out its knowledge, and will not hand this valuable 
document to the firm upon which this draft was 
drawn, until certain that payment has been made, or 
until some satisfactory arrangement has been made 
for payment at some future date. 

A draft may be a sight draft, which means that it 
is payable upon presentation, or it may be a time 


draft. A time draft is a draft payable on a certain 
day or a certain length of time after being presented, 
after sight. 

The Acceptance. The firm upon whom a time 
draft is drawn may, upon presentation, accept the 
draft. The acceptance is made by writing across the 
face of the draft the word accepted, with the signature 
of the party accepting. Usually there is also added 
the date and the place where payment is to take 
place. The draft is then called a trade acceptance. 
Sometimes banks will accept drafts for their clients 
against a moderate fee. Such drafts are known as 
bank acceptances. 

Acceptances are not used very much in the United 
States, but they are very commonly used in England. 
The Federal Reserve Board has at various times sug- 
gested the more general use of this method of financ- 
ing transactions. 

The accepted draft is an evidence of a live business 
deal. As a rule such documents arise as the'direct 
result of the sale of goods. Such a transaction is very 
likely to be self-liquidating. An accepted draft is, 
therefore, readily discoimted at the bank and may 
even be sold in the open market. This is done in 
other countries to a very large extent. Many firms 
which have funds temporarily available for a short- 
time investment, find in the buying of these accept- 
ances a way of employing their idle cash safely. This 
safe kind of commercial paper, therefore, aids in 


mobilizing resources of the community which would 
otherwise lie idle. 

The banks momentarily imable to invest in com- 
mercial paper thus lend their credit by accepting the 
draft, after which it will be readily bought in the 
open market. This situation illustrates better, per- 
haps, than any other banking transaction, that a 
bank's main function is to exchange unknown credit 
for known credit, thereby greatly facilitating the 
processes of exchange. 

The Credit System. As a result of the use of credit, 
either trade credit or banking credit, a merchant is 
enabled to get aloi^ with little working capital. He 
can buy more than his actual cash would allow. He 
can expand his business, the volume of his goods on 
hand, and his sales, way beyond his cash resources. 
He can expand as long as the banks and merchants 
continue to have confidence in his ability and hon- 
esty. Only when they begin to doubt his ability "to 
swing the deal" is a man's growth retarded. A mer- 
chant's progress is no longer limited by what he pos- 
sesses in the way of money, but by his ability and 
energy. In so far the credit system is far superior 
to a system under which no one can engage in a new 
transaction until some other transaction has been 
completed and has yielded its proceeds. 

The only danger in the credit system lies in the 
fact that men are inclined to be overoptimistic. 
They carry others along with their enthusiasm, and 


as a result merchants will sometimes overbuy, 
i. e., overreach themselves, and they may then find 
it impossible to make good their promises of future 
payment. It is claimed by some that optimism and 
pessimism run in waves, and that periods of over- 
buying are followed by periods of depression, when 
everyone is afraid to allow further postponement of 
payment. Everyone owing money will then try to 
sell, with the result that business becomes disorgan- 
ized. Prices decline sharply, banks are called upon 
to produce cash, and a panic results. The only way 
in which such a panic can be avoided is by a limita- 
tion and a careful scrutiny of new credit, and an ex- 
tension and gradual liquidation of the old credit. 
If given time the situation will right itself. 

The Note Broker. Much of the commercial paper 
is sold not directly to banks but through note brokers. 
These are men who have made a special study of this 
kind of investment, and are in touch with banks in 
different sections of the country. The bank, to a 
large extent, relies upon the judgment of the broker 
from whom it buys commercial paper and is thereby 
saved the time and expense of an investigation. 
The notes range in value from $2,000 to $200,000, 

The Credit Man. It is very difficult to know 
whether to allow credit to a certain person or a firm, 
and for what amount. In all large commercial con- 
cerns and also in many banks there is a special official 
who is charged with the duty to decide these difficult 


problems. He is called the credit man. The credit 
man gets his information through various channels. 
He may obtain it through the traveling salesmen of 
the firm who are required to report upon such mat- 
ters, and who gather their information from observa- 
tion, and from conversation with the customers and 
others acquainted with the local business conditions. 
Some credit men place very little confidence in these 
reports because salesmen frequently lack the knowl- 
edge and the analytical mind necessary to come to 
sound conclusions in credit matters. 

He may get his information from the banks. This 
method cannot be very successful for more than one 
reason. The bank does not necessarily know the 
financial condition of the firm, but more than that, 
even if the bank did know, the relations between 
bank and customer are somewhat of a private nature, 
and banks often feel that they would be committing 
a breach of confidence in giving the information 
asked for. 

The next method is to use the reports of the mer- 
cantile agents. There are two important agencies in 
the United States: R. G. Dun and Company, and the 
Bradstreet Company. Both of these agencies inves- 
tigate the credit of firms and individuals, and gather 
data regarding their business experience and reputa- 
tion and the amount of capital invested. The infor- 
mation collected by these agents is published in 
books issued quarterly to subscribers. These volumes 



contain some 1,900,000 names arranged alphabeti- 
cally under the names of the cities. Behind the 
names of the firms appear symbols constituting the 
rating, which indicate the estimated net worth of the 
firm and its past record of business ability and hon- 
esty. The symbols bf R. G. Dun and Company are 
arranged as follows : 









A + 

B + 












Over Ji, 000, 000 

Over $750,000 

$500,000 to $750,000. 

300,000 to 500,000. 

200,000 to 300,000. 

125,000 to 200,000. 

75,000 to 125,000. 

50,000 to 75,000. 

35,000 to 50,000. 

20,000 to 35,000. 

10,000 to 20,000. 

5,000 to 10,000. 

3,000 to 5,000. 

2,000 to 3,000. 

1,000 to 2,000. 

500 to 1,000. 

Less than 500. 




























When only a credit rating appears this 

line of credit designation applies i 2 3 4 

{d) Where an italic d in parenthesis precedes a rating, it is an indi- 
cation that one or more of the partners in the firm are liable in another 
or other firms, and the responsibility is in that sense divided, thus: 
(d) B-fi. 


The absence of a Rating, whether of capital or credit, indicates those 
whose business and investments render it difficult to rate satisfactorily. 
We therefore prefer, in justice to these, to give the detailed reports on 
record at our Offices. 

Ratings of branch houses should be looked up at Headquarters also 

R. G. Dun & Co. 

These general reports may be supplemented by 
means of special reports from the agency which are 
furnished to subscribers upon request and are much 
more detailed and specific. 

In addition to these commercial agencies there are 
established a number of co-operative credit informa- 
tion undertakings, such as the various local credit 
men's associations, which exchemge informatidn upon 
requests from members. 

Summary. The amount of working capital needed 
in any business depends upon many factors: the 
rapidity of turnover, the terms of sale and purchase, 
the length of the manufacturing process, and the 
seasonal fluctuations. More working capital rRay be 
secured by: 

1. Postponing payment on purchases. 

2. By borrowing from banks on promissory notes, with 

or without collateral (collateral may be stocks, 
bonds, or merchandise). 

3. By discounting a bill of exchange or draft. Such 

drafts are made more marketable by acceptance, 
either by merchants or banks. 


Note brokers act as middlemen between borrower 
and lender. The credit man supervises loans and per- 
forms an important service in the business enterprise. 


Same as preceding chapter. Additional references: 

F. A. Cleveland. Funds and Their Uses. D. Appleton and 

J. E. Hagerty. Mercantile Credit. Henry Holt and Com- 

W. A. Prendergast. Credit and Its Uses. D. Appleton 
and Company. 

A. W. Douglas. Merchandising. The Macmillan Com- 


1. Can you see any good reason why in figuring the 
turnover it is necessary to use sales price or retail 
price, both for the total sales and for the valuation of 
stock on hand? 

Reference: Prendergast. Chapter VIH. 

2. How much does a firm lose when it can earn lo per 
cent a year on its working capital, and it neglects to take 
advantage of a cash discount of 6 per cent within ten 
days on a purchase of $2,000 payable in 60 days? 

3. How is a note protested? 
Reference: Cleveland. Chapter VII. 

4. How are credit accounts collected? 
Reference: Cleveland. Chapter VII. 

5. What are the special financial problems involved in 
selling on installments? 

Reference: Lough. Part IV. Chapter XVII. 


6. Explain how the experience of the Westinghouse 
Electric and Manufacturing Company illustrates the 
necessity of extreme care in the investment of capital 

Reference: Lough. Part IV, Chapters XVI, XVII. 


1. It is sometimes said that a society where all pay- 
ments are made in cash is a "static society" and that a 
society where transactions are carried on by credit is a 
"dynamic society." (Static means stationary, not sub- 
ject to expansion. Dynamic means growing, expanding.) 
Can you explain this statement? 

2. Enumerate-the various ways in which a merchant 
may secure the use of more working capital. 

3. What are the different kinds of security which one 
may offer a bank when making a loan? 

4. What is a trade acceptance and what a bank 

5. What are the duties of a credit man and how does 
he secure his information? 

6. What is meant by a credit rating? 



(Borrowing on Long Time) 

Problems of Financing a Growing Business. A 
business may be seriously handicapped and even in 
danger of financial failure from an insufficient amount 
of working capital. But as we have seen, . many 
avenues are open to supply the need by means of 
borrowed money. 

A firm is also handicapped when it has insufficient 
capital investment, when its factory is too small, its 
delivery equipment inadequate, or when its machin- 
ery is out of date. The effect is not likely to be as 
disastrous as when the working capital is insufficient 
and will in most cases be confined to a checking of 
the further development of the enterprise. The 
owners, anxious to supply the imdertaking with the 
necessary funds, may follow two methods. They 
may borrow on long time, or they may enlarge the 
amount of proprietorship funds, either by investing 
more themselves or by inviting others to become 
part owners. 

Advantages of Borrowing on Long Time. Borrow- 
ing has one advcintage which the other method does 
not possess. It supplies new capital without taxing 


the resources of existing owners, and it does not in- 
•crease their number, which would resuh in a decrease 
in the share of the total profits falling to the original 

Suppose that a firm, whether a single ownership, 
partnership, or corporation does not matter, has 
$100,000 capital and is making lo per cent on its 
investment a year. Suppose that the business de- 
mands an investment of $150,000, and suppose that 
the firm then makes 9 per cent on its total invest- 
ment. It must then be plain that the original owners 
would have been wise to secure the addition in capital 
by borrowing money at 5 or 6 per cent, rather than 
to invite in new shareholders or partners. Had they 
invited in new owners then they would have reduced 
the yearly income on their original investment from 
$10,000 to $9,000. By borrowing funds at the rate of 
6 per cent a year they improved their financial 
returns, for of the total earnings which amount to 
$i3i500, only 6 per cent of $50,000 — or $3,000 — 
goes to those who supplied the new funds; $10,500 is, 
therefore, left to the original owners, who instead of 
receiving 10 per cent on their investment now make 
10.5 per cent. 

Disadvantages 0} Borrowing on Long Time. There 
is, however, one great disadvantage attached to this 
method of raising funds. The yearly interest charge 
may become a heavy burden upon the concern. The 
owners of a business have no right to demand any- 


thing as a return from a business unless it is earned, 
and in case of a corporation, not unless the board of 
directors have declared the earnings available for 
distribution. It is different with the interest pay- 
ment on borrowed money; this falls due every year 
or every half year or quarter, whether the business 
prospers or not. If anything goes wrong, this pay- 
ment may become a heavy burden and may lead to 

Need for Security. Nor will it be possible to obtain 
money on loan for a long period without offering 
good and unmistakable security. The situation is 
quite different from securing working capital. The 
mercantile loans or bank loans discussed in the last 
chapter are all for short periods — thirty, sixty, and 
ninety days. A keen business man can look that far 
ahead, or at least he believes he can, which amounts 
to the same thing. When a loan is asked for ten, 
twenty, fifty years or even longer, too many uncer- 
tainties enter in which make it necessary to ask for 
good security. This security is usually given in the 
form of a special right or lien on a specific piece of 
property, sometimes on property already in existence, 
at other times on property to be bought with the 
funds made available by the loan. The owners 
thereby sacrifice the right of free disposal of their 

The Mortgage. This right or lien is usually evi- 
denced by a contract called a mortgage. A mortgage 


is a contract of sale, but a conditional sale which be- 
comes automatically void upon the payment of the 
loan with interest upon the date of maturity. The 
loan itself is evidenced by a promissory note, in every 
respect like an ordinary note of that kind, but at the 
bottom of which are affixed the words, "This note is 
secured by mortgage of even date herewith." The 
amount borrowed, the rate of interest, the maturity 
of interest and principal, are all mentioned in the 
note. What is commonly called a mortgage consists, 
therefore, of two documents, the contract of con- 
ditional sale, and the promissory note. 

Should the borrower fail to pay interest as agreed 
upon or should he fail to pay the principal when due, 
then the holder of the note and the mortgage has the 
right to take possession of the property and to 
operate it for his benefit or to sell it as the case may 
be. This is called foreclosure of the mortgage. 

The Bond Issue. As long as the amount of money 
which is involved is not very large the borrower will 
not have very great difficulty in finding someone to^ 
lend him the funds, provided the security offered is 
above question. One reason why a comparatively 
high rate of interest is charged for such loans is that 
mortgages are not readily marketable. They are for 
odd amounts and the security is only locally known. 
The larger the amount, the more difficult it becomes 
to find anyone willing to invest that much in one 
kind of security. 


This objection is met by the subdivision of the 
promissory note into a number of convenient denomi- 
nations such as $100, $500, or $1,000 each. Such 
notes are called bonds. The only difference, then, 
between a promissory note secured by a mortgage, 
and a bond secured in the same way, is that the bond 
is one of a series all of which together take the place 
of the promissory note. 

The Trust Company. When there is one promis- 
sory note, the lender holds the note and the mortgage. 
The mortgage or conditional sale is recorded at the 
courthouse, and the lender may feel certain that no 
other loan will be made which may endanger his 
rights. It is different when instead of one note there 
are a large number of bonds, and when these are 
sold in widely scattered places. The first problem is 
who shall hold the mortgage, and the next problem 
is who shall see to it that no more bonds are issued 
than are called for in the agreement. 

The trust company here steps in to fill this need. 
This trust company must not be confused with the 
trust organizations refenjed to so frequently in the 
newspapers, such as the tobacco trust, the liquor 
trust, or the steel trust. The trust company here re- 
ferred to is a banking institution. It differs from a 
commercial bank in that it does not usually handle 
checking accounts, but deals principally in time de- 
posits and long-time investments. It performs, how- 
ever, the services of a bank in bringing together the 


borrower and the lender, cind in lending its name, 
reputation, and credit. 

Usually a trust company is appointed to represent 
the lenders, to act in the nature of a^ trustee, though 
this function may be performed by other institutions 
or by a private individual. The duties of the trustee 
are to hold the mortgage, which in the case of a bond 
issue is usually called a deed of trust, to see to it that 
no bonds are issued in excess of the value of the loan 
to be consummated, and to protect the interests of 
the bondholders. From this it might be inferred that 
the trustee is appointed by the bondholders. This 
is not usually the case. In the case of corporation 
bonds the trust company is, as a rule, appointed by 
the corporation. 

Closed and Open Mortgages. Usually, when selling 
bonds secured by a mortgage, the amount to be sold 
is publicly announced, and it is agreed that even 
though the value of the property may far exceed the 
"amoimt of the loan, no additional bonds shall be 
issued under the same mortgage. This is called a 
closed mortgage. 

Sometimes, however, in order to leave an opening 
for raising funds in the future on the same 'security, 
the amount to be issued is not definitely limited and 
may be increased at a later time. This is called an 
open mortgage. Railroads sometimes issue bonds in 
this way and limit the amount to be issued by a fixed 


rate per mile of track. Such open mortgages may 
lead to many abuses. 

Once a bond issue has been sold against a closed 
mortgage on a piece of property, it is possible to use 
that same security again for the same purpose. The 
right to a first claim on the security, however, can- 
not be taken away from the original bondholders; 
they hold the first mortgage bonds, while later issues 
based on the same security will be known as second, 
third, or even fourth mortgage bonds. The later 
issues do not in this case affect the rights of the pre- 
ceding ones. 

Equipment Trust Bonds. A mortgage or deed of 
trust on immovable property is but one of several 
ways of oflfering security to the bondholders. Equip- 
ment trust bond^ are bonds based upon the security 
of equipment, such as machinery, railroad cars, street 
cars, or locomotives. Such bonds usually arise as 
follows: Suppose a street car company needs new 
cars but has no available funds. It must then borrow 
the money. A trustee is appointed to buy the cars, 
to issue bonds to finance the purchase, and to lease 
these cars to the street car company. The trustee 
may be a trust company or may be a corporation 
formed solely for this purpose. The cars remain the 
property of the trustee and are merely leased to the 
company in order to protect the bondholders. The 
yearly rental to be paid by the company must cover 
the interest due to bondholders, expenses of adminis- 


tration, and enough more to accumulate within the 
period of life of the cars, a fund sufficient to pay off 
the principal of the debt. 

Collateral Trust Bonds. Another type of bonds 
exists which bears very close resemblance to the 
promissory notes discussed in the preceding chapter. 
These are the collateral trust bonds. They are issued 
against a deposit of collateral. This method of issu- 
ing bonds is often used by public utility companies. 
Many railroad systems are composed of a number of 
branch lines. In order to concentrate and sometimes 
in order to acquire the ownership of the obligations 
of these subsidiary lines, railroad companies fre- 
quently place the bonds of these lines in the hands 
of a trust company, and issue new bonds against 
them as security. 

The well-known credit of the large or parent com- 
pany frequently causes these collateral trust bonds 
to sell for a higher price than the value of the collat- 
eral would justify. 

The Income Bond. What makes bonds secured by 
the methods just; described attractive as an invest- 
ment, is the fact that they hold out guarantees both 
in regard to the regularity of income and to the ulti- 
mate repayment of the principal. Income bonds, 
though secured as to the principal, hold out no 
promise of a regular rate. They receive their income 
only if it is earned. In so far they are no better than 
a share of stock, except for the mortgage lien. As a 


matter of fact, the income bond is a good deal less 
desirable than a share of stock, for the stockholders 
will postpone payment of interest on these bonds as 
long as they can, either until the bonds mature, or 
until enough has accumulated to allow the stock- 
holders to share in the division of income. The bond 
may wait a long time for a return and does not hold 
out the possibilities of a large return in the future. 
A stockholder as part-owner, shares in the profits,, 
a bondholder can never get more than the interest 
promised him in the bond. 

The Debenture Bond. While the income bond gives 
no certainty in regard to income, the debenture bond 
fails to give the certainty in regard to principal which 
other bonds offer. A debenture bond is no other 
than a promise to pay a certain amount of money at 
a certain time and to pay interest for its use. In 
most cases the debenture bond is protected by some 
special right or power which is intended to guarantee 
regular payment of income. Usually a clause is in- 
serted in the bond stating that the principal becomes 
due automatically upon default in payment of the 

The Life of Bonds. The life of bonds varies greatly. 
Some are issued for short periods of five or ten years 
and others for fifty years or longer. As a rule, indus- 
trial companies do not issue bonds for longer than 
about twenty-five or thirty years. In many cases, 
companies will refund their bonds at maturity. 


When a favorable interest rate can be secured the 
company may prefer not to withdraw the money 
from business, but to pay off the old loan with the 
proceeds of a new bond issue. This process is called 
refunding a loan. 

The total debt represented by bonds is called the 
funded or permanent debt. Short-term loans may be 
referred to as unfunded. The only difference be- 
tween these two classes of liabilities is the length of 
the period for which the loan is made. 

The Price of Bonds. Suppose that in order to raise 
$100,000 a thousand bonds of $ioo each are issued; 
how much interest must be promised in order to sell 
these bonds for $ioo each? That depends first of all 
upon the interest which other loans like it are offer- 
ing, and also upon the confidence which the public, 
or the small group of possible investors, has in the 
security offered. The less confidence they have in it, 
the higher the interest rate that must be offered in 
order to persuade them to pay $ioo for the bonds. 
This $100 is called the face value of the bonds be- 
cause it is the amount printed on the face of the cer- 
tificate. When a bond sells for its face value we say 
that it sells at par. 

Many bonds sell below par. This may result from 
a combination of causes. In most cases it will indi- 
cate that at the same rate of interest other and safer 
security can be found. It is interesting to note that 
to the company which issues the bonds, selling below 


par is quite as expensive as promising a highfer rate 
of interest. That the company sells below par rather 
than raises the interest rate may be merely the 
result of miscalculation. 

Suppose that the issue referred to above of one 
thousand bonds of $ioo each would sell at par when 
promising 6 per cent. Then it is certain that the 
price would decline below par if only 5 per cent were 
offered. How much below cannot be determined un- 
til we know the life of the bond. The reasoning of 
the lender of money, i. e., the investor who buys the 
bonds, is as follows: "I can get 6 per cent on my 
money on perfectly good security, as good as of any 
issue like it promising 6 per cent. I am, therefore, 
interested in investing in this bond issue, but only 
on condition that I can make 6 per cent on my 
money. Suppose now that the investment were for- 
ever, that the bonds never matured, then I have 
only my yearly rate to consider, I want 6 per cent, 
or $6 on every $100. One of these bonds pays $5 a 
year; that means an equivalent of 6 per cent on 
$83.33. Leaving the question of the principal out of 
consideration, therefore, as far as yearly income is 
concerned, that bond is worth $83.33." 

He can afford to pay more, however, because when 
he buys the bond he not only buys income, but also 
^loo sometime in the future. In other words, he 
buys an addition of ^16.67 to his invested capital. 
The sooner this event takes place, the more he will be 


willing to pay for the bond. Bond buyers will, 
therefore, increase the amount they are willing to 
pay with regard to the date of maturity of the bonds. 

In buying bonds the investor considers, therefore, 
two things: First of all the rate, that is, the rate of 
interest promised ; but of most direct interest to him 
is the yield. This is the actual rate of interest earned 
by the money invested in the bond when bought at 
the current market price. The yield consists of two 
factors: First, the yearly return on the investment 
resulting from the regular interest pajments; and 
second, the difference between the price paid for the 
bond and the par value, expressed in terms of a 
yearly payment for the period ending at the date of 
maturity of the bonds. 

In order to figure this yield it is necessary to use 
difficult algebraic formulas and we shall not enter 
into that question here. For the use of investors.and 
bankers many bond tables are available from which 
one may read off quickly the net yield of bonds of 
almost any market price, rate, and maturity. When 
bonds are selling above par the yield may be calcu- 
lated in a similar way. This yield will then be less 
than the promised rate of interest. 

The Repayment oj Bonds. Upon the borrower rest 
two responsibilities. He must pay the interest regu- 
larly and he must be prepared to pay off the principal 
when the bonds fall due. Many corporations are 
compelled to refimd their bonds because they have 


made no adequate preparation for paying off their 
debt at maturity. 

When the security upon which the bond issue rests 
remains unimpaired or increases in value, failure to 
provide for redemption is not a very serious matter 
though it may lead to difficulties. A railroad keeps 
up its roadbed by constant repairs and renewals, 
while the right to use the roadbed, i. e., the fran- 
chise, is usually perpetual and increases in value 
year by year. A mortgage on a roadbed is, there- 
fore, excellent security and refunding, can take place 
comparatively easily. 

The situation becomes different when the security 
consists of assets which decline in value. Declining 
or 'depreciating values are : rolling stock of a railroad 
or street-car line, mining property, forest lands, 
houses, and machinery. Where such security is 
offered as collateral, two conditions must be fulfilled: 
first, the bonds must not have a longer life than the 
estimated life of the assets; second, during the life 
of the bond a fund must be accumulated which will 
make redemption at maturity certain. Such a fund 
is called an amortization fund and the process of 
accumulation is called amortization. Here again, 
compound interest calculations must be used to 
determine what yearly sum shall be set aside to 
accomplish the desired end. 

Summary. The problem of securing the necessary 
funds for permanent investments, i. e., capital in- 


vestments, is also important. These funds may be 
secured by talcing in new partners, which means an 
increase in the claimants when profits are to be 
divided, or by borrowing on long time. The latter is 
often to be preferred. It may be necessary to give 
security. A mortgage is such security. Where large 
amounts are needed a bond issue may be floated. 
There are various types of bonds. They differ 
according to the security offered for the payment of 
interest or for the ultimate redemption of the loan. 
The life of bonds varies but is usually more than ten 
years. The factors which influence the price at 
which bonds will sell are: condition of the money 
market, rate of interest and kind of security offered, 
and life of the bonds. 


The same as the preceding chapters. 


1. What various methods are open by which capital 
funds may be increased? 

Reference: Lough. Part III, chapter IX. 
Cleveland. Chapter VIII. 

2. Enumerate and explain the character of the various 
kinds of long-time paper. 

Reference: Cleveland. Chapter VIII. 

3. What are the chief advantages of entrusting the 
administration of bond issues to a trust company? 

Reference: Cleveland. Chapter XIII. 



1. What is the chief disadvantage of borrowing on 
long time? 

2. Describe what documents make up what is usually 
called a mortgage? 

3. What is a trust company? 

4. Enumerate and explain the character of the dif- 
ferent types of bonds mentioned in this chapter. 

5. What factors determine the price of bonds? 

6. What will be the effect of an increase in the average 
rate of interest upon the price of bonds? 




The Bank. Many institutions and business under- 
takings place their resources and financial experience 
at the disposal of the business men and aid them in 
financing their business. Among these institutions 
the banks have a first claim to our attention. There 
are two classes of banks: commercial and non- 
commercial. Commercial banks are of the greatest 
interest to business men. These are banks which 
confine themselves largely to short-term transactions. 
They logically become the depository for accounts 
subject to check, and aid in the financing of domestic 
and foreign business transactions by discounting 
commercial paper. 

There are a large number of fineincial institutions 
which are classified as non-commercial banks. 
These are: 

1. Loan and trust companies 

2. Savings banks 

3. Insurance companies 

The Commercial Banks. The relations of the 
commercial banks to the business world have been 
discussed in the chapter on Working Capital. Their 
main function is to aid business by their credit 


facilities, to mobilize the financial resources of the 
community, and to receive on deposit funds mo- 
mentarily idle. 

It is very important that business men should 
understand the essentials of the operation of a bank. 
Commercial banks may be national, state, or private. 
National banks operate under a national charter, 
state banks under a state charter, while private 
banks are unincorporated. The large private banks 
are engaged mostly in the promoting and financing 
of enterprises and either do not carry on any com- 
mercial banking business or do so only incidentally. 

Large commercial banks consist of many depart- 
ments. One prominent New York City bank is 
composed of the following departments: New York 
City accounts, out of town accounts, credit, new 
business, foreign business, securities, operation, 
and auditing departments. 

The chief executive officers are usually a president 
with a number of vice-presidents. They direct the 
policy of the bank and constitute the link between 
the outside world and the bank proper. The opera- 
tion of the bank is entrusted to a cashier and a 
number of assistant cashiers. They are assisted by a 
large number of clerks and tellers. 

The Making of a Deposit. When a new customer 
presents himself at the bank and desires to make a 
deposit, i. e., to open an account, he is directed to the 
cashier, assistant cashier, or one of the vice-presidents. 


whichever one of these Is in charge of new customers. 
He must be properly introduced by a customer in 
good standing. The bank looks upon each customer 
as a potential borrower, and it is therefore important 
that none but reliable people be allowed to open 

The depositor has a right to issue checks. Since 
the handling of such checks and the keeping of the 
customers' accounts requires the time of the bank's 
employees, and is therefore costly, banks usually 
require a minimum deposit. In case accounts are 
allowed to fall below this minimum, a charge is made 
for the services of the bank. Such a minimum may be 
as low as $25, but in some banks is as high as $5,000. 
The banks figure that unless the deposit is large the 
interest which the bank can earn by using this 
money as a basis for loans does not offset the cost of 
handling the account. 

The depositor now makes out a signature card 
which is "kept as a record in the bank to enable the 
tellers to compare it with the signature appearing 
on the checks. If the bank does not use "due care 
and diligence" in making payment, and it should 
pay a check with a forged signature, the bank would 
have to bear the loss. 

The next step is to make the deposit. The cus- 
tomer must fill out ar deposit slip upon which the 
various kinds of cash items which may be deposited 
are listed separately. He inserts his name and the 


date ajid presents the slip at the receiving teller's 
window with the money, checks, or coupons which 
he intends to deposit. This deposit slip is a valuable 
record which the bank keeps as evidence that a 
certain amount was deposited. Should any difficulty 
arise, the slip made out by the customer himself and 
accepted as correct by the bank would quickly 
settle the question. 

The customer receives as his receipt a pass book. 
Formerly this pass book was presented at the bank 
once a month, or less frequently in order to enable 
the bookkeeper to enter the withdrawals and to 
balance the book. Practically all banks now use the 
statement which is a monthly account of deposits and 
withdrawals, and which is sent to each customer 
with the canceled checks for comparison. The pass 
book continues to serve as a receipt for deposits. 

In case the depositor expects to leave the deposit 
undisturbed for a long period, he may notify the 
receiving teller that he does not want to open an 
accoimt "subject to check," but desires to make a 
time deposit. The bank agrees to pay interest on 
such deposits and issues a receipt called certificate 
of deposit. It is usually understood that no interest 
is to be paid unless the money remains undisturbed 
for a period of three months. Interest is sacrificed on 
all withdrawals made before the end of that period. 

In case the depositor desires to use the deposit 
with the bank to pay a debt in another city and he 


fears that his own check will not be acceptable there, 
he may ask for a cashier's check for the amount, or 
he may write a,check himself and have it certified by 
the cashier. In both cases the amount of the check 
is charged to his account as a withdrawal and the 
check becomes a direct obligation of the bank. 

The Receiving Teller. The receiving teller sends 
the deposit slips to the individual bookkeeper at the 
end of the day, or in blocks or batches at stated inter- 
vals during the day, but first he makes a record of 
these slips to enable him to make out at the end of the 
day a receiving teller's proof. This is a sheet upon 
which are listed the different kinds of items received ; 
cash, notes, checks, etc. Their aggregate amount 
must of course be the same as the total of all the 
slips. If any of the items have been sent on to other 
departments of the bank, the total amounts received 
by these departments plus what is left in the teller's 
cage must equal the amount of the deposit slips. 

The Individual Bookkeeper. The individual book- 
keeper receives the deposit slips and uses them to 
make entries on the individual accounts. These are 
accounts with depositors or individuals, hence the 
term individual bookkeeper. He also receives all 
checks drawn by customers of the bank; these are 
called own checks. In all cases, therefore, a pajmaent 
made by check between two depositors in the same 
bank results merely in two bookkeeping entries in 
the individual bookkeeper's department. One entry 


to decrease the balance on the account of the cus- 
tomer by whom the check was drawn, the other to 
increase the deposits of the customer in whose favor 
the check was made out. In large banks there are 
many such individual bookkeepers, and to facilitate 
their work the individual ledgers are made of loose 
leaves and split into a number of ledgers of con- 
venient size. 

The Paying Teller. The paying teller pays checks 
drawn by customers of the bank against their 
accounts. He also cashes many other items, such as 
bond coupons, as an accommodation to customers. 
His is a very difficult position, for once a payment is 
made, mistakes are not easily corrected. It is 
different with a receiving teller who may correct a 
mistaJce discovered after the depositor leaves the 
bank. It is therefore considered a promotion for a 
receiving teller to be made paying teller. 

The paying teller starts the day with a certain 
amount of cash in his cage. As he makes his pay- 
ments throughout the day and his cash dwindles he 
replenishes it from the vault or from the cash which 
the receiving teller sends him. At the end of the 
day the paying teller makes out the paying teller's 
proof. In his case all canceled checks and other 
items upon which he has made payment must show 
a total equal to the amount of cash which has 
disappeared from the cage. 


The canceled items are sent to the individual book- 
keeper in so far as they represent payments made on 
account of* depositors of the bank; other items are 
sent to the various departments where they belong. 
If they are checks drawn on banks of the same town 
and members of the clearing house, they are sent to 
the clearing house desk; if drawn on other banks of 
the same town the items go to the collection depart- 
ment; if drawn on out-of-to-wn banks the mail desk 
or mail teller takes care of them. The paying teller 
must constantly be on the alert that payment is not 
made for the wrong amount or to the wrong person. 
His work is complicated by the fact that he has to 
watch for checks upon which he has received a stop 
payment order from the drawer. As soon as an order 
not to pay a check previously issued is received, 
a card is filled out giving all information and also the 
reason for the stop payment, such as "check stolen," 
"check lost," etc. This card is constantly before 
the eyes of the paying teller near the cage window. 

The Note Teller. The note teller is in charge of the 
notes. He aids in the preparation of notes and super- 
vises the collection of interest and principal. In 
case collateral is deposited he inspects the collateral, 
and keeps himself informed of any changes which 
may occur in its market value. Notes are always 
discounted for less than the market value of the 
collateral. The difference between tlje actual value 
of a collateral and the amount of the loan is called the 


margin. The note teller must not allow this margin 
to be wiped out by a sharp decline in the market. 
Should the margin be in danger then he must call for 
additional collateral. 

The note teller keeps a note register which is a 
list of all the notes held by the bank. He also keeps 
a direct liability and an indirect liability register. In 
a direct liability register the loans made and the 
notes discounted are recorded under the name of the 
customer directly liable. This enables the bank to 
tell at a glance whether it is safe to allow the custo- 
mer to borrow an additional amount. The indirect 
liability register shows how many notes each custo- 
mer has indorsed. Such indirect or contingent lia- 
bility may at any time become a real liability should 
the person directly liable fail to live up to his financial 
obligations. A large indirect liability may, therefore, 
prevent a person from borrowing any more himself. 

The Clearing House. In the course of a day's busi- 
ness a bank receives from its customers a number of 
checks drawn on other banks. The items on out-of- 
town banks are sent out by the mail desk or out-of- 
town department to one of the bank's correspondents 
for collection. Such a correspondent is a bank in 
another town with which the bank carries on a 
reciprocal business. 

The checks drawn upon other banks in the same 
town or city must be collected by the bank itself. 
The likelihood exists that the other banks in town 


will in turn have received from their customers and 
from out-of-town correspondents, checks drawn upon 
most of the other banks in that city. In order to 
save each bank the trouble of sending out runners 
to collect the checks and to carry the money back 
with them to their banks, a clearing house is estab- 
lished. This is a large room where representatives of 
the banks gather, each at his own desk, and where 
they exchange their checks. Only the differences or 
balances are then settled in money. This saves much 
time and means also a great economy in the use of 
money. To give an example: Suppose bank A has 
checks drawn on bank B for $5,000, while bank B 
has checks drawn on bank A for $4,500. If each bank 
sent out a runner to collect these items these men 
would pass each other on the street, one carrying 
$5,000, the other $4,500 of cash, a total of $9,500. If 
these men meet at the clearing house, bank B pays 
bank A for the $5,000 worth of checks with its 
$4,500 worth of checks and still owes $500. This is 
a simple case. ^ 

In most clearing houses there are a large number 
of banks, some twenty or thirty. Each of these 
banks sends clerks to collect checks on other banks 
and to pay checks presented, but no actual payments 
take place. The whole question of payments is re- 
duced to a bookkeeping transaction, a question of 
debit and credit. Every bank brings claims in the 
form of checks and receives evidence of money 


which it owes to the other, i. e., to all banks repre- 
sented in the clearing house. The difference be- 
tween these two claims forms a balance to be paid, 
or a balance to be received. This is a balance not 
with any one bank but with all the banks, in other 
words, with the clearing house. The balance is, 
therefore, paid to, or received from, the clearing 
house. Millions of dollars in checks brought by 
banks into the clearing house may be thus settled 
by a payment of balances amounting to very small 

Safety Deposit Department. Many banks main- 
tain a safety deposit vault and rent boxes to those 
who want a safe place to keep valuable papers. 
Usually these' boxes are kept in a large vault which is 
closed at night, and each box is locked with two in- 
dependent and different locks. The key to one lock 
is given to the renter, the key to the other lock is 
held by an official of the bank who must identify the 
customer before admitting him to the vault. 

Other Departments of a Commercial Bank. The de- 
partments and officials discussed are the ones with 
whom a business man most frequently comes in 
touch. Importers sind exporters deal with the foreign 
exchange department, which handles all drafts and 
other financial documents drawn by or upon foreign 
banks or firms. In the larger banks a foreign trade 
department is matntained which advises customers 
who are buying or selling in foreign markets, keeps 


them informed of market conditions, and often 
brings them in touch Avith reliable firms who can act 
as their foreign representatives. The larger banks in 
New York, such as the National City Bank, the Irv- 
ing National Bank, and the Guaranty Trust Com- 
pany, publish pamphlets and weekly or daily lists 
containing financial or trade information, and dis- 
tribute them free among their customers. 

In all banks are found, moreover, a collection de- 
partment which collects all local items, and an 
accounting department of which the individual book- 
keepers are a part. 

Loan and Trust Companies. Among non-com- 
mercial banking institutions the trust companies are 
of most vital interest to business men. As a rule 
such companies do not handle short-term transac- 
tions though some of them combine a commercial 
banking business with their loan and trust business, 
and many of them maintain a separate banking 
department. The trust companies, because they do 
not deal in demand obligations, can safely invest in 
real estate and loans on inactive securities for long 
periods. They perform, as the name indicates, prin- 
cipally trust functions. They act as mortgagees in 
trust for bondholders; they administer estates; col- 
lateral, mortgage, and equipment trusts; and act as 
fiscal agents for corporations. A fiscal agent is a 
duly appointed agent who receives and pays out 
funds. In this capacity they pay the bond principal 


at maturity or pay the interest when due. The work 
of transfer agents and registrars is usually intrusted 
to a trust company. They also administer under- 
writing syndicates, and in case of reorganization or 
dissolution they act as receivers, looking after the 
interests of the bondholders. 

Many of these functions could be performed and 
are not infrequently performed by individuals, but 
there are advantages attached to intrusting these 
duties to a trust company. The principal advan- 
tages are that trust companies are permanent, they 
are experienced, they have regular business hours, 
their transactions are coniidentid, and they are in 
close touch with the financial world, and, therefore, 
better informed than most individuals. In former 
days trust companies carried on an insurance busi- 
ness along with their other activities, but this is no 
Jonger customary. Trust companies all operate tra- 
der state laws and legal requirements differ widely in 
the various states. 

Savings Banks. In the ordinary course of iDUsiness 
a business man will have little occasion to deal with 
savings banks. These are a class of non-commercial 
banks which are primarily organized to afford a safe 
cind moderately profitable means of investing small 
savings. These banks appeal to the working classes 
and to persons of moderate incomes who accumulate 
slowly by small weekly or monthly installments. 
Safety, and a fairly good return, are the ideals for 


which the management of such banks strive. In 
order to attain these ideals they invest only in safe 
and tried securities, based upon real estate or issued 
by municipal, state, or federal governments, or by 
industrial concerns of proven stability. Conse- 
quently, such banks cannot be expected to pay their 
depositors upon demand. Investments such as they 
make are safe, but cannot be quickly turned into cash 
in large quantities. Savings banks, therefore, do not 
favor demand withdrawals. They either require 
notice a certain number of days before withdrawal 
will be permitted, or they limit the amount which 
may be withdrawn at one time. 

The fact that interest is only paid on deposits 
which remain with the bank for a certain minimum 
period, usually three months, acts as an inducement 
to allow the deposits to remain imdisturbed. The 
surplus money which must be kept available for 
withdrawals from day to day is usually deposited 
with commercial banks who pay the savings banks a 
small amount of interest on such deposits. 

Savings bank accounts, since they are not subject 
to demand, are not active. This means that the em- 
ployees of the bank must use double care not to make 
payments to anyone not entitled to receive it. 
Tellers quickly learn to recognize the signatures of 
active depositors, but no one can remember a cus- 
tomer or his signature if the depositor presents him- 
self at the bank only a few times a year. Such banks, 


therefore, refuse payment except upon presentation 
of the pass book. 

Savings banks in the eastern states are frequently 
charitable institutions operated with no thought of 
profit. All earnings are then divided among the de- 
positors or members. In the middle western and 
western states, savings banks are organized as cor- 
porations like commercial beuiks. They promise a 
regular rate of interest and the net earnings are paid 
out as dividends to the stockholders. As buyers of 
fiscal bonds and mortgages, savings banks form an 
important channel through which the small savings 
of the masses find productive employment. 

Insurance Companies. Insurance companies serve 
the business world in two ways. First, they aid in 
solving the problem of risks which every business 
faces, and second, they absorb large quantities of 
securities, and thus supply to commerce and industry 
the working and capital funds needed. This needs 
further explanation. Life is full of uncertainty. No 
one knows when death will call him, or when some 
disease or accident will render him temporarily and 
permanently unable to work. Fire may destroy 
without warning the savings of a lifetime, and even 
in a bank's fireproof vaults, thieves may break in and 
make away with the valuable contents. It is inter- 
esting that these uncertainties may be reduced to 
certainty. The number of houses that bum each 
year in any one city or in the entire United Statf^ 


varies but little. Every year about the same number 
of people pass away, except, of course, in time of war 
or epidemic. The number of automobile accidents 
is a fairly constant figure and so is the number of 
thefts. This means that it is possible to predict, not 
which particular house will bum next year, but with 
a fair degree of certainty how many houses are likely 
to be destroyed in New York during that same period, 
and with even greater certainty how many will be 
burned in the United States as a whole. 

The larger the territory covered the less local con- 
ditions will influence our figures. One incendiary 
may cause the fire loss in a country town to rise far 
above normal, but his work will have little effect 
upon the figures of the country as a whole. The 
same reasoning holds true of the death, sickness, ac- 
cident, and theft statistics. 

Reducing Uncertainty to Certainty. If in a town of 
a hundred thousand houses, one hundred houses bum 
every year, the house owners may agree to establish 
a fund by regular contributions from which all fire 
losses would be paid. This fund would not need to 
be larger than to rebuild one hundred houses a year. 
Every house-owner would, therefore, be called upon 
to pay one one-thousandth of the value of a house 
each year. But in return he would have the promise 
that should his house bum it would be rebuilt from 
the general fund. This is the principle upon which 
all insurance is based. 


By forming a sufficiently large club of people all 
facing the same risks, and by studying carefully the 
experience in the past of such risks — the longer the 
period the better — ^it is possible in almost every case 
to arrive at a figure which will indicate what may 
reasonably be expected in the future. Some fluctu- 
ation will occur, but if studied over a long enough 
period, even this fluctuation will be discovered to 
take place with regularity. 

If each business man had to face his own risks, 
commerce would be much hampered, if not Impos- 
sible. Who, indeed, would dare stock his warehouse 
full of expensive goods, investing not only all that he 
possessed but funds borrowed from others as well, 
when a carelessly dropped match of some minor em- 
ployee might start a fire. Such a fire would bring 
ruin to the owner and would destroy the means of 
paying those from whom he borrowed. Insurance 
makes it possible for him to protect himself against 
this uncertainty. A comparatively small yearly pay- 
ment in the common fund buys him certainty. He 
may now expand his business, tie up all his funds, 
and borrow from others. The risk of fire is no great 
cause of worry, to him. 

Insurance as. a Business. Sometimes such funds 
are administered co-operatively. Such insurance or- 
ganizations are called mutuals. Most of the insurance 
is in the hands of companies which make a business 
of writing insurance and the stockholders of which 


reap the benefit of the difference between losses paid 
and earnings. These earnings are derived from pre- 
miums or the periodic payments of the people in- 
sured, and also from the income of the investments 
made. Every insurance company must set aside a 
reserve, and is frequently compelled by law to do» 
so. From this reserve, unexpected fluctuations in 
losses are met. The funds of this reserve are in- 
vested in bonds and stocks and yield a substantial 

Different Types of Insurance. Many risks have iiL 
this way been reduced to regular payments. It is 
possible to insure against sickness, accidents, un- 
employment, and death. Caruso was insured against 
loss of his voice, while Paderewski insures his fingers. 
The business man finds it possible to insure against 
fire, against loss of goods at sea, against losses result- 
ing from dishonesty of employees, or from faulty 
titles to real estate. He may protect himself in the 
same way against storms, hail, and frost. He may 
insiu-e his goods, his building, his- furniture, or his 
plate glass windows. ' 

Fire Insurance. Besides considering the actual 
normal risk from fire, a fire insurance company must 
also consider the moral risk. It is not difficult to see 
that after a piece of property has been insured, the 
owner is likely to be a little more careless with it. He 
says to himself, "It is insured, anyhow, so I don't 
care." He may even go so far as to destroy it inten- 


tionally in order to collect the insurance. This is a 
problem to be reckoned with in all insurance, but 
most of all in property insurance ; for it is not likely 
that Paderewski would deliberately put his hand 
against a band saw or that a man would commit 
suicide to collect the insurance. In fire insurance, the 
moral risk is a real risk. The policy, which is the 
contract between the insurance company and the 
insured, "always is careful in stating that the amount 
which will be paid by the company will not exceed 
the cash value of the property destroyed. The actual 
loss must be determined after the fire occurred. This 
clause is intended to limit the moral risk, for if pay- 
ment were made for the face value of the policy re- 
gardless of the value of the property at the time of 
the fire, having fires might become a profitable line 
of business. Many states, however, have passed 
valued policy laws under which the insurance com- 
pany is compelled to pay the face value of the policy 
in case of total loss, even though the actual loss is far 
less than that. 

In order to bring uniformity in the insurance busi- 
ness many companies have by mutual agreement 
adopted a standard policy. This policy is a formid- 
able document. The principal features are the fol- 
lowing: In the first place, the policy insures only 
against "direct loss or damage by fire," but this must 
be interpreted to mean fire which has escaped from 
its proper receptacle. No damages can be collected 


on a coat scorched by being hung near a red-hot 
stove. Loss resulting from lightning is, therefore, not 
covered unless special mention is made of it; neither 
does the contract offer protection against theft in the 
process of removing goods from a burning building. 
If goods insured are spoken of in a contract as in one 
building, they are no longer protected if removed 
from this building. 

When a fire has occurred the insured must give 
immediate notice in writing and he must send in a 
statement of the amount of his loss, accompanied by 
a statement of a notary public that he regards the 
claim to be honest. Usually there is a clause in the 
policy which provides for the appointing -of ap- 
praisers who are to pass upon the justice of the 

The rate which must be paid for fire protection is 
determined to a large degree by the kind of risk 
offered for insurance. A wooden building standing 
near a wooden garage is more in danger of being 
totally destroyed than a concrete fireproof structure 
in the middle of a field. The wooden building would, 
therefore, have to pay a higher price for the insur- 
ance protection. The following factors influence 
the cost of insurance : 

1. The type of building; whether wood, stone, or con- 


2. The use to which it is gut. An ice storage plant runs 

less danger of fire than a garage. 


3. The fire prevention measures taken. A store with a 

sprinkler system, that is, a system of water pipes 
which automatically spray water into the store 
when heated to a certain temperature, pays a low 

4. The surrounding buildings. A good building may 

have to pay a high premium or annual payment 
because surrounded by poor risks. 

5. The condition of the street and of the fire fighting 

equipment of the town. A wide, well-paved street 
makes it possible for the apparatus to reach the 
building quickly. A greater loss is likely to result 
where fire has to be fought with a low pressure 
municipal water supply than where a special high 
pressure system has been installed for fire fighting. 

Marine Insurance. When goods are shipped by 
water it becomes necessary to insure them against 
losses resulting from the "perils of the sea" as well as 
from fire. These risks are covered by marine insur- 
ance. Much of the marine insurance business in this 
country is handled by foreign companies, among 
which English companies are the most important. 

The English marine insurance is centered in 
Lloyd's. This is a corporation of which marine in- 
surance companies are members and which has as its 
piupose to protect the interests of its members, to 
collect and to distribute information in regard to 
shipping, and to conduct an insurance business. The 
agents of Lloyd's are found'in every important ship- 


ping center. Tiiey are charged with collecting infor- 
mation regarding ships, inspecting vessels, reporting 
upon losses, and with aiding in collecting evidence. 

An important publication published by an affil- 
iated organization, is Lloyd's Register of British and 
Foreign Shipping, which is a catalogue of all Engli^ 
ships of over one hundred tons and of a large number 
of foreign ships. A detailed description of the ship 
is given, and the vessel is rated on the basis of a regu- 
lar inspection. This rating determines the rates 
charged for insurance. 

Lloyd's Corporation of Underwriters makes it pos- 
sible for many companies to -underwrite large risks 
together. This is called underwriting, because each 
company signs or underwrites the policy. The total 
risk is thereby divided over a large number of com- 
panies, sometimes as many as fifty. This means a 
wide distribution of risk for each company, and it 
lessens the effect which the sinking of a large, expen- 
sive ship would have on the finances of an individual 
insurance company. 

A large number of diiferent policies are issued, 
some covering the ship, and others the cargo; some 
protecting against damage from the "perils of the 
sea," and others against theft or lighterage accidents. 

Usually polides issued for goods carry the "F. P. 
A." clause (free from particular average). Average 
means damage. This clause indicates that the insur- 
ance company does not undertake to protect the 


shipper against partial losses or damage. The policy 
covers, in such cases, only a total loss resulting from 
the destruction of the ship, and also general average. ' 
Any charges made against ship and cargo to cover 
damages .incurred by a particular shipment in 
order to save the ship, such as throwing it overboard 
to lighten the vessel, are called general average and are, 
therefore, covered by the policy. It is possible to 
insure goods 'W. P. A." (with particular average), if 
the shipper desires it. 

Credit Insurance. Every business man who sells 
goods on credit faces the risk of not being able to 
collect. Under normal conditions and when due care 
is used in extending credit, these losses run fairly 
even. This normal loss is different in every kind of 
business ; in some it is one per cent of sales ; in others 
as high as four per cent. As long as these credit 
losses remain normal the business man is nottro"ubled. 
He will merely charge that much more for his goods, 
counting his credit loss as part of his cost of doing 
business. What does cause him worry is the possi- 
bility of an unexpected and unusual loss. Against 
this unexpected loss he can insure himself with a 
credit insurance company. The normal or initial 
loss he must bear himself. 

A credit insurance company will not insure against 
all abnormal losses, but limits its payments to a cer- 
tain percentage of the capital rating which the firm 
has received in Dun's or Bradstreet's credit reports. 


If a customer is rated at $50,000, then the credit in- 
surance will cover a loss not exceeding, say 25 per 
cent of this, or $12,500. In addition to this, the 
insurance company will limit the amount which will 
be paid on any one account. This is known as the 
single account limit. Suppose that the single account 
limit in the case given was $10,000, then the payment 
upon this account, notwithstanding the high capital 
rating, could never exceed $10,000. The merchant 
would have to face the remaining loss. 

In most cases only accounts with firms which are 
classified in the first two classes of credit by Dun and 
Bradstreet can be insured. In Dun's classification 
only high and good credit risks are insurable. 

In addition to all these limitations the insurance 
company will limit its total liability to a fixed sum. 
No matter what the losses are, the company can 
never be called upon to pay more than that sum 
upon the policy issued. Credit insurance is still 
comparatively new, but manufacturers and whole- 
salers are increasingly making use of the protection 
it offers. 

Fidelity Insurance. When an employer hires a new 
employee, places him in a responsible position, allows 
him to handle large sums of money or to collect bills 
from customers, he is taking a risk. The employer 
■will, therefore, require that the employee offer some 
security by which he may be reimbursed in case of a 
loss. The employee may ask some of his friends to 


"go bond" for him, that is, to promise his employer 
that they will make good any loss resulting from dis- 
honesty. But not everyone has rich friends who are 
willing to do this, nor is everyone willing to -bother 
his friends with such requests. 

The fidelity insurance company takes the place of 
these friends and in return for a fee, paid by the em- 
ployee or the employer, undertakes to protect the 
employer, after a careful investigation has been made 
of the trustworthiness of the new employee. The 
employer is protected more securely than when 
friends undertake to protect him, for the company is 
more likely to live up to its obligations. The pre- 
mium is determined by the statistics of risk, and also 
by the actual amount of money which it will be 
possible for the employee to misappropriate. In 
order to limit this amount the insurance company 
will frequently require certain internal checks. This 
usually means that the making of payments and the 
authorization for payment are placed in the hands 
of different employees. Frequently such companies 
require checks to be signed by two officials, while pay- 
ments in cash must be reported at the end of each 
day to some other official or employee. Companies 
undertaking this kind of insurance are called fidelity, 
guaranty, and bonding companies. 

The Stock Exchange. The stock exchange.provides 
a market or meeting place for buyers and sellers of 
stocks or .bonds. Such exchanges are found in many 


large cities. In New York three such maxkets exist, 
the New York Stock Exchange, the Consolidated 
Stock Exchange, and the Curb. Each of these stock 
markets is an association of men who make a profes- 
sion of buying and selling securities. Trading on 
these exchanges is limited to its members. There is 
a good reason for this. The exchange is established . 
not only in order to provide a place where trading 
may be done, but also to regulate this trading. The 
rules of the exchange are very strict and any one vio- 
lating them faces the danger of losing his seat. 

The New York Stock Exchange is stricter in its 
regulations than the other two mentioned, both in 
the supervision of trading and in its requirements 
imposed upon the companies which are anxious to 
have their securities admitted to the exchange. Its 
rules for membership are exceedingly strict and the 
number of members is limited. 

The stocks and bonds which satisfy the require- 
ments of the New York Stock Exchange are listed 
and are spoken of as listed stocks or listed bonds. In 
order to have its securities listed, a company must 
submit detailed information regarding assets, lia- 
bilities, the number of shares authorized, a list of the 
officers and directors, and the addresses and names of 
the transfer agent and the registrar. Moreover, the 
Exchange requires that annual reports containing 
telance sheet, profit and loss statement, and operat- 
ing statistics be sent to the stockholders. The New 


York Stock Exchange also allows dealings in se- 
curities which are unlisted, but tTiese, too, must 
satisfy certain requirements before being admitted 
to this privilege. Banks will lend more readily upon 
listed than upon the unlisted securities when pre- 
sented as collateral. 

Stocks and bonds not admitted to the New York 
Stock Exchange are bought and sold on the Consoli- 
dated Stock Exchange cuid on the Curb. The latter 
is an exchange held in the open air a short distance 
from the New York Stock Exchange building. 

The Brokers. A broker is a person who buys or 
sells goods for others. The pay received for this 
service is called commission. A broker dealing in 
stocks and bonds is called a stock broker or bond 
broker. Not all brokers are members of an exchange; 
they may deal through others who are members. In 
the New York Stock Exchange the membership is 
limited to 1,100, and seats are sold at high prices by 
members who wish to retire. The prices paid vary, 
but as much as $80,000 has been paid. The buyer 
must have the approval of the membership com- 
mittee. The members all charge the same rate of 
commission, which in the case of transactions for 
outsiders is no less than one-eighth of one per cent 
on the par value of securities. 

How Stocks and Bonds Are Sold. The brokers and 
the stock exchanges perform very important services 
to the business world. Without this financial ma- 


chinery, corporations would have great difficulty in 
finding a market for their securities. Through the- 
exchanges investors are enabled to buy large varieties, 
of securities, and they are constantly on the alert for 
those which promise not only a fair return, but also> 
a possible rise in price. 

Right here a word may be said about investment, 
and speculation. If one buys securities with the in- 
tention of keeping them, and largely because they 
promise a good return on the purchase price, then, 
this may be called making an investment. It is differ- 
ent when one buys securities with the intention of 
selling them soon and to make profit on the change- 
in price. This is speculation. The line is difficult tch 
draw — it is largely a matter of intention. 

Securities bought for investment are almost always . 
paid for in cash. The reason they are wanted is bie- 
cause someone has a cash surplus. Stocks bought for 
speculation are almost always purchased with funds 
obtained by borrowing from the banks. Suppose a 
speculator desires to purchase $10,000 worth of 
stocks. He may go to a bank and borrow enough to i 
make this possible. Usually a broker will do this, 
for him. 

The bank is willing to lend the necessary funds on 
condition that the securities be placed in its vault as 
collateral. Naturally a bank will not lend up to the 
market value of the stocks or bonds but will require 
a margin. This may be 10 per cent of the market. 


price or more, as the case may be, depending upon 
the class of security offered, and upon the market 
price. The speculator will have to supply the re- 
mainder. By this method a man with $i,ooo may 
speculate upon the possible rise in value of $10,000 
worth of stock. The bank cannot lose as long as the 
market price of the stock does not fall below the 
amount of the loan. 

The buyer must pay the bank interest on the loan 
and must pay a commission to the broker. Should 
the market price fall, the bank will call upon him 
to increase his collateral or to supply more margin. If 
he is unable to furnish either, then the bank will sell 
out and he must face his loss. The fear of losing the 
investment often drives such speculators to mis- 
appropriate funds to satisfy the demands for more 
margin. They always hope that a sudden change in 
the market will enable them to sell with a profit and 
to cover up their dishonesty. 

The market for stocks and bonds is extremely sen- 
sitive to all financial, economic, and political changes. 
Every national Eind international event has its effect. 
Those dealing in securities must, therefore, keep a 
close watch upon prices, and study world conditions 

The optimism in some quarters is reflected in the 
bulls, that is, those who buy with the expectation 
that prices will go up ; while pessimism in the future 
of prices leads to bear dealings. The bear sells stock 


for future delivery, say a week later, and hopes that 
the price will have declined sufficiently to allow him 
to buy at a lower price than the one for which he has 
contracted to deliver. This is short selling, while a 
bull is long of the market. These two opposing camps 
are constantly contending and keep the market 

The stock exchange performs, therefore, several 
important functions in the business world. It pro- 
vides a regular and regulated market for securities, as 
well as strict supervision over its members. Regular 
dealings make it possible for investors to invest their 
money with the knowledge that they can turn their 
investment into cash at any time in the future. The 
exchange also makes it possible for. the banks to find 
a profitable market for some of their funds which 
otherwise would lie idle, by lending on collateral. 
Without stock exchanges corporations could not 
easily find a market for their securities, and industry 
would depend for its expansion largely upon local 

Summary. Many institutions offer aid to the 
business man in the solving of his financial problems. 
The banks, loan and trust companies, insurance com- 
panies, and the stock exchanges are the most impor- 
tant financial institutions. The commercial banks 
aid in supplying the current needs of business, 
the non-commercial institutions are largely active in 
offering opportunities for the expansion of permanent 


capital funds. Insurance is a great aid in the financ- 
ing of business. By means of it uncertainty is re- 
duced to certainty. The stock exchanges provide a 
ready market for the sale of securities. The brokers 
are the officially recognized traders on these ex- 



R. S. Harris. Practical Banking. Houghton Mifflin 

A. K. Fiske. The Modern Bank. D. Appleton and Com- 

W. H. Kniffin. The Practical Work of a Bank. The 
Bankers Publishing Company. 

H. Parker Willis. American Banking. La Salle Exten- 
sion University. 

Trust Companies 

F. B. Kirkbride and J. E. Sterrett. The Modern Trust 
Company. The Macmillan Company. 

Savings Banks 

W. H. Kniffin. The Savings Bank and Its Practical 
Work. The Bankers Publishing Company. 


S. S. Huebner. Property Insurance. D. Appleton and 


Stock Exchanges 

Conway and Atwood. Investment and Speculation. 

Alexander Hamilton Institute. 
S. S. Pratt. The Work of Wall Street. D. Appleton and 

W. H. Lough. Business Finance. The Ronald Press. 




1. What departments are found in the bank with 
which you are best acquainted? 

Reference: Interview with some official of the bank.. 

2. What system is used in that bank to keep its. 
depositors informed of the condition of their accounts? 

Reference: Interview with some official of the bank. 

3. Is "paying and receiving" done by one teller, or by 
two, or by several? Or are the two combined in several- 
windows? Can you discover the reason for the arrange- 
ment that exists? 

Reference: (a) Harris. Chapters V, VI. 

(&) Interview with paying or receiv- 
ing teller of the bank. 

4. What type of savings bank exists in your city? 
Reference: (a) Interview with official of the bank.. 

(b) The banking law of the state. 

5. What does the law in your state say in regard to the 
carrying on of a banking business by a trust company?" 
Do you see a good reason for the regulation? 


Reference: (a) The banking law of the state. 

(6) Kirkbride and Sterrett. Chapters 
I, II, IV. 

1. How are insurance rates determined? 

Reference: Huebner. Chapters XVI, XVII. 

2. What may a business man do to lower his insurance 

Reference: Huebner. Chapter XX. 

3. What causes have contributed to give England 
prominence in marine insurance? 

Reference: Huebner. Chapter XXII. 

Stock Exchanges 

1. What is meant by call loans? 

Reference: Conway and Atwood. Chapter IV. 

2. What are the requirements for admission of stocks 
to the list? 

Reference: Ibid, Chapter IV. 

3. What is the New York Stock Exchange clearing 

Reference: Pratt. Chapter IX. 

4. What is a subscription right, and how is its value 

Reference: Lough. Part III, Chapter XIII. 

5. Describe how a brokerage house handles an issue of 

Reference: Lough. Part III, Chapter XIV. 



1 . Describe how a deposit is made. 

2. What are the duties of the individual bookkeeper? 

3. How does the clegiring house operate? 

4. What factors determine the rate to be paid for 
fire insurance? 

5. What is meant by "average"? 

6. What kind of protection is offered by a credit 
insurance company? 

7. What is a stock broker? 

8. What is meant by short selling? 

9. Distinguish between speculation and investment. 




The Problems of Management. The management of 
a concern may be in the hands of the owner, or in the 
case of a partnership, in the hands of one of the part- 
ners. In corporate enterprises and frequently in un- 
incorporated undertakings a manager is appointed to 
supervise and direct the enterprise. Such a manager 
usually has full control over the buying, manufactur- 
ing, and selling, though he is responsible for his work 
to the owners. In some corporations an executive 
committee is appointed to confer frequently with the 
manager and no important decision can be taken 
without its consent. 

The manager brings together the raw material, the 
tools and machinery, the working force, and directs 
the processes of production. His aim should be to 
combine these elements in the most effective way so 
that he may obtain the greatest net result. The man- 
ager's position is a very difhcult one and one which 
demands wide knowledge and deep insight. He must 
know a good deal of the methods of production, of 
tools and their correct use ; he must be something of 
an engineer. He must not only know the physical 
plant, he must also understand the financial prob- 


lems that affect a concern. Not only large output 
but output at competitive cost should be his aim. 
He must, therefore, understand the buying and selling 
market ; he must be something of a business man. In 
order to be able to interpret the records of the con- 
cern, he should have some knowledge of accounting. 

Finally, he should know not only how to get results 
in respect to volume and cost of output, he should be 
able to get these favorable results without sacrificing 
the human element in the business. Success in out- 
put should go hand in hand with making better, 
stronger, happier men and women out of the working 
force. A business concern which attains material 
success at the expense of those who work within its 
walls is a social menace. The manager, therefore, 
faces no small problem. 

The Manager as a Jack of All Trades. As long as 
the business unit is small and the workmen few in 
number, and as long as these workmen are largely 
skilled experts in their own line the manager will be 
able to oversee all details of the business himself. He 
relies to a large extent upon the knowledge and skill 
of his workmen for the efficient execution of the work. 
He also relies upon his personal contact with them 
to settle any difficulty or friction. He usually has 
climbed up from the ranks and is sufficiently ac- 
quainted with the processes to be able tfa supervise 
tiiem and even to instruct the workmen. To be sure 
he does not show equal efficiency in all the various 


functions he is called upon to perform, but he is in no 
worse shape than his competitors who are facing the 
same important and unrelated duties. 

This type of one-man organization is still found 
quite generally; it is the typical organization of a 
small concern. The owner or manager attends to 
everything and is usually very jealous of his powers 
of control. Feeling that no one can perform these 
various functions as well as he, he is afraid of del- 
egating authority to others. 

When the business grows large it becomes humanly 
impossible for one man to look after every detail. It 
is, therefore, necessary to appoint assistants. When 
it is decided to take this step some definite plan of 
dividing the duties and the authority of those ap- 
pointed must be outlined. The division of work 
which first suggests itself is that into production, 
sales, and administration or office departments. In 
addition to a general manager, three submanagers 
who are directly responsible to the general manager 
will be appointed. The various clerks and working- 
men in these departments remain the same, the only 
difference is that they are from now on responsible 
to the production manager (or factory superinten- 
dent), the sales manager, or the office manager, as the 
case may be, and not directly to the general manager. 

There are certain fundamental principles which 
must be observed in this and every type of business 
organization, for these principles are basic: 


1. The men and women in the organization should be 

selected with due regard to their fitness for the work 
that is expected of them. 

2. The work and duties of every member of the organiza- 

tion should be sharply defined so that responsibility 
can be readily located. 

3. Orders should be standardized, so that no feeling may 

, be created that the order is unreasonable and unfair 
as between different employees. 

4. Orders from executives down the line to workers and 

reports from workers back to executives should all 
be in written form as far as possible to avoid mis- 
understandings and disputes. 

5. Every member of the organization should be made to 

feel that he is getting a "square deal," should be 
made to realize that only teamwork can produce 
results. His interest in the success of the firm and 
in his own work should be awakened. 

6. Once authority hias been delegated the executive 

should never interfere with the work. He should 
hold his subordinates responsible for results, but 
should encourage them to exercise fearlessly initia- 
tive and control. Nothing has such a disintegrating 
effect upon the organization as executive inter- 

The Line Organization. As the number of workers 
increases in the production department, the super- 
vision may be still further divided, and foremen ap- 
pointed who are directly responsible to the production 
manager or superintendent. 




■ 111 
















■ oa ■ 
















In the sales department a similar subdivision may 
take place, and heads of departments may divide 
among them the supervision of advertising and of the 
salesmen in the field. 

The office department may also be subdivided. 
A head stenographer then controls all stenographic 
work, a head bookkeeper supervises all the account- 
ing work, and a head correspondent looks after all 
correspondence. In every case, these minor ex- 
ecutives are directly responsible to the managers of 
their departments. 

The type of organization just described is called the 
line organization, for authority flows in a straight line 
from manager to foreman, and from foreman to work- 

Directing our attention towards the production de- 
partment, let us stop for a moment to consider what 
are the duties of a foreman under this type of organi- 
zation. In a plant engaged in a simple continuous or 
analytical industry his job is simple enough. In a 
flour mill, for instance, all he needs to do is to control 
the speed of the various production centers and to 
supervise the repairs and adjustments. But eveii 
here he is expected to do some things for which 
neither his training nor knowledge fit him. One of 
these is the hiring and discharging of workmen. In 
respect to that function he is, indeed, a little poten- 
tate who can do no wrong, for frequently there is no 
appeal from his decision. 


The Duties of the Foreman. In a factory of the 
assembling type things are worse. Here the foreman 
is called upon to read blue prints, to interpret them, 
to explain them to the workmen, to aid them in set- 
ting up the necessary tools and machinery, to regu- 
late the speed of the machine and of the feed, to look 
after repairs and upkeep of the tools, and to see that 
workmen are supplied with the proper raw materials 
at the right time and in the right place — these are but 
a few of the many matters that demand his attention. 
If he is imfortunate enough to work in a factory 
where no very definite departments exist so that the 
ipheres of authority of the foremen are not sharply 
defined, he must not only perform the many duties 
enumerated, but he may spend part of his time in 
argument with his fellow foremen to determine 
where the authority of one begins and that of the 
other leaves off. Wherever lines of authority are not 
sharply drawn the tendency will be for men to shift 
responsibility upon others. 

This is not an exaggerated picture. Many plants 
are operated on a plan very similar to the one de- 
scribed. It is small wonder, therefore, that no very 
great efificiency results. The demands placed upon 
the foreman are often superhuman demands. An all- 
round man may attend to all these functions fairly 
well, but he cannot be expected to achieve maximum 
efificiency in all of them. The principal, and some 
claim the sole advantage, of this type of management 


lies in its simplicity and in the ease with which re- 
sponsibility can be located. 

The worst feature of this type of organization lies 
in the relationship of the members to each other. In 
order to secure maximum efficiency, it is necessary to 
secure whole-hearted and enthusiastic teamwork. 
But everything seems to indicate that real teamwork 
cannot be expected to develop naturally in this kind 
of organization. 

What Keeps the Men at Work? The superintendent 
must show results. He can only show results if the 
foremen show results in their various departments, 
and they in turn depend upon their workmen. The 
system, therefore, frequently deteriorates into a sys- 
tem of driving. The manager drives the superin- 
tendent, the superintendent the foreman,, and the 
foreman speeds up the workmen. This is often called 
drive-management. "Keep busy" and "Step lively" 
are the mottoes of this type of management. It is all 
the more vicious since no one in the organization has 
a very definite notion of what constitutes a fair day's 

Every workman has his own notion about the tools 
which he should use, and uses them according to 
his own method. There is little uniformity in the 
methods of work of the tmen, and, therefore, little 
vmiformity in time and in quantity of output. If 
asked how long a job should take, almost every man 
would give a different answer. Everything is based 


on guesswork and those who do the work have noth- 
ing to gain by aiding their overseers to arrive at a 
fairly accurate estimate. Soldiering, loafing on the 
job, making work, are all bred under this kind of 
management. The manager and the foremen want 
maximum output; the workmen have nothing to 
gain by increasing the output. By unusual exertion 
they would merely set a higher standard for them- 
selves and others, which they will be forced to equal 
from then on with no reward if they attain it. 

The principal driving force in such a system of 
management is fear. The fear of discharge is held 
over the heads of the workmen as a club. The few 
workmen who would excel are held back by the 
criticism and illwill of their fellow workmen who 
resent a speeder, and frequently, also, by the illwill 
of the foreman who is always more or less in fear of 
having to give up his job to some workman of ex- 
ceptional ability. The foreman is afraid of being 
shown up. It is little wonder, therefore, that the 
ambition of many workmen soon becomes to do as 
little as they can without being discharged. 

The Problem of Securing Co-operation. The modem, 
wide-awake manager is not satisfied with the old 
type of management and seeks in some way to intro- 
duce other elements into the organization in order 
that co-operation and teamwork may take the place 
of driving. 


We discover as we study this primitive method of 
management that its faults are principally: 

1. The foreman is expected to do too many unrelated 


2. There is a general lack of information as to what 

constitutes a normal amount of work. 

3. There is no other incentive given the workmen, except 

fear of discharge. 

The interesting thing is that the first two faults 
are both the result of a misconception of the true 
function of management. This needs to be explained 
in more detail. 

Every productive act may be analyzed into three 
parts: first, the idea; second, the planning of the 
processes by which the idea may be materialized; 
and third, the actual doing or the execution. Sup- 
pose that we are asked to write an essay, we would 
not start in writing until we knew what we were going 
to tell and until we had a fairly definite notion as to 
how we were going to tell it. If these two preliminary 
stages are completed, the writing itself is relatively 
simple. Of course, the actual writing demands great 
skill, but it is skill of a different type. It is skill in 
doing, while the thought and outline demand skill in 
planning. And so it is whenever anything is to be 
produced. The planning precedes the execution and 
demands a different type of knowledge and skill. 

What causes the confusion in the old organization 
is that both foremen and workmen are called upon 


to do a great many things which should have been 
done for them. And because they have been custo- 
marily expected to do so many things which really 
lie outside their sphere, no one has paid very much 
attention to their efficiency in doing the work which 
was specifically theirs. 

No ono would expect a workman at the bench to 
design a motor or some other complicated piece of 
machinery. He has not been trained to do this. It 
is equally unreasonable to expect a workman or a 
foreman to interpret the drawing and to know the 
best way of planning the execution of the article. 

In other words, as managers begin co look for a 
way of simplifying the work of tlie foreman so that it 
may be possible to find some one capable of filling 
the position, they discover that the first step should 
be to relieve him of all the planning work. Such 
work should be done by the management and should 
not be left to the shop. 

Some factories are subdivided into a large number 
of sharply separated departments, which all receive 
orders from and render reports to some central office 
or executive. Every department can then be made 
small enough to allow one man to supervise it prop- 
erly and to attend to all the functions of the foreman. 
This simplifies! the work of the foremen, but it does 
not solve the problem of taking out of their hands 
the various management functions, neither does it 


solve the problem of a more cordial relation between 
workman and manager. 

In this and the following two chapters we shall 
study various methods used in plants, ofhces, and 
stores to create a family spirit in the business con- 
cern. We shall see that the methods fall jfito four 
groups : 

1 . A different kind of management changing the flow of 

authority and defining more and more sharply the 
work demanded of each man. 

2. Various ways of rewarding the workman. 

3. Concentrating the control of the working force in a 

separate department; taking control of hiring and 
discharging the employees out of the hands of the 
person in charge of operation. 

4. Various "welfare" schemes intended to elevate the 

workman morally and mentally, and to teach him 
the value of co-operation. 

It is never good policy to drive a person against his 
will. The only successful kind of management is one 
based not on driving but on leadership. Leadership 
is the capacity to make men pull together toward a 
common goal. That is the central problem of the 
manager. The first step in the right direction is to 
make the work demanded of men reasonable and 
adapted to their capacity. The establishing of a 
planning department between the drafting room and 
the shop is a result of this demand. 


The Planning. Instead of handing to the foreman 
a copy of a blue print and telling him to go ahead, 
the manager will insist that this print be first care- 
fully analyzed by the planning department. A pro- 
duction order is here made out which is a list of the 
compongnt parts of the articles to be produced. This 
makes it possible to tell first of all what parts are 
ready in stock; second, what parts must be bought 
outside; and third, what parts should be made in 
the shop. 

The planning department should now plan the 
work carefully. Suppose that the finished article is 
to be completed on the first of November or there- 
abouts. Suppose further that the actual assembling 
will take about a week. Then the planning depart- 
ment will know that all component parts must be 
ready for assembling not less than a week before the 
first of November or about October twenty-fifth. 
Some parts may have to be ordered. The purchasing 
department is notified to see to it that such parts are 
ordered and are on hand in time. Special tools may 
also be ordered ahead in this way so that they will be 
on hand when needed. 

Now the work of each part to be produced may be 
planned. A part which requires three weeks to be 
completed should be started in ample time so that it 
may be ready for assembling, and must be started 
just two weeks before a part requiring only one week 
for completion is begun. 


The planning department should have a record of 
each machine, of the work which is in process on the 
machine, and of the work which is waiting to be 
done. A bulletin board is frequently used for this 
purpose with two clips or pockets for each machine, 
one for in process, the other for assigned work cards. 
It is then possible to tell with little trouble which 
machine will be ready to undertake the new piece of 
work on time. The storeroom is now notified to set 
aside the required raw materials. 

The next thing is to draw up careful instructions 
to the workman, telling him : 

1 . What he is expected to make. 

2. What is the best way of making it. 

3. How long the job should take. 

It is easily seen that the giving of these instruc- 
tions is a part of the work of the management, while 
the foreman should see that the instructions are fol- 
lowed. This is a logical division of authority and is 
a reasonable task to set the foreman. 

Lack of Accurate Knowledge Becomes Evident. So 
far everything has gone smoothly, but when one is 
called upon to give instructions, it is, first of all, 
necessary that the one giving the instructions possess 
definite and accurate information. 

Go into any shop and ask the opinion of a number 
of workmen regarding the best way of doing a cer- 
tain piece of work, the speed of the machine, the 


correct kind of tool to use, how fast the rough piece 
to be worked must be fed under the tool, and a 
variety of other questions, and every man in the 
shop will have a different answer. Call in the mana- 
ger or the foreman and the confusion will only be 
increased. And still these are all physical facts 
which cannot be settled by opinion, or guess work, 
or majority vote, any more than an answer can be 
found by any of these methods to the question, 
"How many miles can this machine run on one gallon 
of gasoline?" 

All such physical facts may be determined by sci- 
entific methods. If it is a question of what kind of 
tools should be used for a certain machine process, 
experiments may give the answer, not approximately 
right, but with absolute accuracy. It is the same 
with all the other intricate mechanical problems of 
the shop. It cannot be denied that it is important 
that the best way of doing a piece of work should be 
discovered before the work is undertaken. It is plain 
that in no other way can maximum efficiency be 

It is of equal importance that the workman should 
be properly trained to do the work in that way and 
that he should be supplied with the proper facilities. 
Finally, it also seems logical that in some way the 
workingman must be interested in the results to be 
obtained. These almost self-evident principles, how 
ever, are to a large degree violated in most business 


concerns. They operate successfully but can never 
hope to reach their maximum efficiency until all 
guesswork has been eliminated and displaced by 
accurate information. 

Scientific Management. The system of manage- 
ment which aims to apply these principles and which 
endeavors to eliminate all guesswork and to place 
all information and instructions regarding the work 
in the shop on a truly scientific basis is called scien- 
tific management, or sometimes, after its originator, 
the Taylor system of management. 

This system will now be described, but before any- 
thing further is said, it must be understood that the 
preliminary work of installing such a system is ex- 
tremely costly and few concerns can afford to go to 
the expense of adopting it. This does not, however, 
destroy the value of a study of the system, for every 
concern can introduce some features of the system, 
and thereby greatly increase its efficiency. Our main 
interest in this method of management is in the prin- 
ciple which it illustrates, namely, how business may 
profit by a scientific approach to its problems. 

The Management Should Look After All Management 
Functions. This is the first principle which scientific 
management considers as fundamental. The estab- 
lishment of a planning department is in recognition 
of this principle and scientific management carries 
this principle to its logical conclusion. The practical 
result is that the planning department is now sub- 


divided into four functions, each intrusted to a clerk 
or a group of clerks. The clerks are : 

1. The routing clerk. His duty is to plan the routing of 

the work through the factory. He determines when 
work is to be started and what workmen or machine 
is to do it. 

2. The instruction card clerk. This clerk makes out 

careful instructions for the workmen to follow. In 
order to enable this clerk to give such instructions 
he must be supplied with information from the 
drafting room, and from the scientific laboratory, 
where experiments are constantly carried on. He 
may also receive information which has been filed 
by the 

3. Cost and time clerk. This clerk collects all informa- 

tion of past performances, showing the time re- 
quired to perform a certain piece of work, and also 
such information as may become available through 
the laboratory which carries on all time studies. 
This clerk determines the standard time for each 
piece of work. This information is also entered 
upon the instruction card, for, as we shall see later, 
a workman under this method of management is 
usually rewarded with reference to whether he per- 
forms a "standard task," or whether he falls below it 
or exceeds it. 

As a cost clerk, the clerk collects all information 
which comes to him from the shop in regard to the 
time spent in finishing a job in all its various stages. 
This information reaches him on the workmen's 
cards which give the rate of pay of the workmen' and 


the time spent on each job. From this information 
the clerk makes up the job cost and the time sheet. 
The latter is a statement of the wages due to each 

4. The shop disciplinarian. He settles disputes between 
workmen among themselves, between workmen 
and foremen, and looks into questions which are 
submitted to him by foremen or planning depart- 
ment officials, whenever the human element is 
involved. In this way, the disciplinary control 
over the working force is taken out of the hands of 
the shop foremen as being a managerial function. 

In the shop the only work that remains now is to 
execute the work by following the instructions intelli- 
gently. It cannot be said that the workmen and 
foremen need not exercise thought because a part 
of their thinking has been done for them — they are 
as much required to think and to be wide awake as 
an automobile driver when passing through a crowded 
street. He knows the rules of traffic, he knows he 
should not try to push the car in front of him, nor 
stop so suddenly as to cause a collision with the car 
behind. His instructions are all clear, he knows the 
mechanism of his car, and yet it can hardly be 
claimed that he does not need judgment and intelli- 
gence. In the case of the workman in the shop, so 
much is left for him to determine that one of the most 
important functions of the foreman is to instruct him 


and aid him in following instructions and in achieving 
the standard set for the work. 

As far as the supervision of the work of the shop 
is concerned, this also takes on a different aspect 
when scientific management is introduced. The fore- 
man who looked after everything is now supplanted 
by specialists : 

1. The instructor or gang boss, who aids the workman 

in following instructions and teaches him to reach 
the greatest efficiency. 

2. The repair boss, who sees to it that the machine is in 

good repair. 

3. The machine speed boss, who adjusts the speed and 

oversees the transmission of power. 

4. The inspector. This specialist is necessary because 

without him workmen might be content to increase 
their output at the expense of quality. 

The Human Factor. In the shop the work is done 
not only by machines but by men and women. Up 
to this point we have spoken of efficiency in manage- 
ment as if it were principally a matter of finding the 
right tool and the right machine for the purpose. 

But the whole question of machinery and tools is 
secondary as compared with the problem of securing 
maximum efficiency from the human factor in pro- 

The term maximum efficiency has an antagonizing 
effect upon the minds of many people. They at once 
think of a cruel, unfeeling slave driver speeding the 


worker to ever greater and greater exertion, and 
greater output until at last, broken in body and 
spirit, the worker gives way to others. 

Maximum efficiency cannot exist under isuch con- 
ditions of management. True efficiency is not mea- 
sured solely in the output of to-day, but in sustained 
output, and it is impossible to maintain a rate of out- 
put which is procured at the sacrifice of health and 
vigor. In order to secure true efficiency the work- 
man must be made the subject of careful study. Such 
a study of the human element and the subsequent 
changes in technique will usually require the follow- 
ing steps: 

1. Careful analysis of the work. 

2. Elimination of all unnecessary motions. 

3. A thprough training in the necessary motions so that 

the right rhythm and speed is obtained. 

4. Careful attention to the comfort of the worker and 
5. Well-planned rest periods. 

Motion Study. When watching a group of men at 
work, one is very soon impressed by the fact that 
some seem extremely industrious, while others are 
slow-moving and deliberate. There is a great tempta- 
tion to jump to the conclusion that the easy-going 
man is lazy, and is far less productive than the active 
fellow. It is a curious thing, however, that the very 
opposite may be true. 

The reason why one man seems so much more ac- 
tive than some other worker at the same task is that 


he "fusses around," goes through a great many un- 
necessary motions. Once this is recognized it is 
easily seen that efficiency can be increased by elimi- 
nating all unnecessary motions, and by concentrating 
upon those which are really productive. Greater out- 
put may then be secured with the same amount of 

In The New Industrial Day Mr. W. C. Redfield 
states this in the following words: 

The day of the "rule of thumb" in our factories is not 
yet ended, though its sun is setting. Many superin- 
tendents manage to-day as they managed of yore — true 
offspring of the industrial conditions under which they 
grew up. There is a fearful waste of energy, of human 
strength and thought, and even of life, and waste also of 
time and of material and of attention given relatively 
trivial things, while more serious matters pass unnoticed. 
We have depended much heretofore on mere drive, or as 
we call it ''hustling" — crowding into the compressed hours 
of busy days more and more, and winning out by inten- 
sity of effort and by dint of strenuous application rather 
than by the scientific efficiency which saves all waste 
and applies the principle of the least effort to produce the 
greatest result. 

Many unnecessary motions often result from the 
fact that the raw material is not placed conveniently, 
and that the finished product may have to be re- 
moved by the worker to some distant point. The 
saving which may result from eliminating these un- 


necessary efforts is easily seen. It is more difficult, 
however, to discover the unnecessary motions in the 
performance of the work itself. One way to dis- 
cover them is to take moving pictures of the work- 
man as he works and to study these. The paths over 
which his body and his hands travel may then be 
studied, and all uimecessary motions may be iso- 
lated. It is quite possible to study such work with- 
out the use of a camera, though it frequently requires 
a skilled eye to see just what is going on. 

What can be accomplished by a study of this kind 
is well illustrated by the classical example of the 
bricklayer. People were laying bricks as long ago 
as the days of the Babylonians. It was, therefore, 
reasonable to expect that of all work, the laying of 
bricks would be one of the most efficient. But evi- 
dently experience and traditional workmanship have 
much to learn from scientific analysis. It was dis- 
covered that an ordinary bricklayer goes through at 
least eighteen or nineteen motions to lay one brick. 
By changing the position of the bricks and of the 
mortar, by raising the scaffold so that the bricklayer 
never needed to exert himself to reach the top of the 
wall, by careful mixing of the mortar which made it 
unnecessary to give the brick the traditional taps to 
make it slide into place, and by a few other similar 
small changes, the number of movements was reduced 
from eighteen to from four to six, and the output 
increased from i,ooo to 2,700 bricks a working day. 


Gilbreth, one of the early exponents of scientific 
management, describes his experiences at the Indus- 
trial Exposition of London, where, after watching a 
girl at work for a short time, he introduced a number 
of improvements which resulted in a reduction of the 
time required to put a paper cover on twenty-four 
boxes, from forty seconds to twenty-six and finally 
to twenty seconds. 

After all, in these wonderful performances there 
need be little that surprises us, for we constantly see 
all around us examples of similar increased efficiency 
resulting from an analysis of the work, followed by 
instruction. The touch method of typewriting is a 
good case in point. A careful study, eliminating all 
unnecessary movements has preceded careful train- 
ing so that the right habits may be formed. Muck 
of the workman's inefficiency is the result of wrong 
habits, which he acquired partly through imitating 
others from whom he learned his trade, and partly 
through individual variation. It is a part of the 
management of a factory to see to it that the workers 
acquire the right kind of work habits. Given the 
right kind of tools, it is possible to arrive at the best 
way for a man to work with the tool. It now rests 
with the management to make it worth while for the 
workman to learn to do his work in this one best 
way, to break old habits, and to acquire new ones. 

Rest Periods Must Be Planned. It must always be 
remembered that maximum efficiency cannot be ob- 


tamed by driving. A wise manager not only frowns 
on driving by foremen or superintendent, but he pro- 
tects a workman against his own ambition. Rest 
periods of sufficient frequency and length to allow 
for complete recuperation are absolutely essential. 
This means not only that the working day must be 
short enough to allow for ample rest in the evening 
and during the night so that the worker may return 
refreshed to the morning's work, but it also means 
that the work must be interrupted whenever a cer- 
tain degree of fatigue is reached. 

The experience of managers is practically unani- 
mous that a change from a ten-hour day to an eight- 
hour day has resulted in more work of a higher 
quality. This must not be taken to mean that 
therefore six hours is better than eight, and four 
better than six — a certain amount of fatigue is a 
good thing, physically and mentally. The man who 
never works past the first feeling of fatigue until he 
gets his "second wind" never discovers his latent 
strength, and gradually deteriorates. Many people 
think they are tired when they are merely lazy and 
have not even started to exert themselves. 

Two examples may be quoted to show how more 
rest resulted in larger output. In one bicycle factory 
120 girls worked ten and one-half hours a day. The 
manager called in a scientific management expert 
who, after bringing some minor improvements, cut 
the working day to eight and one-half hqurs and 


allowed one ten-minute rest period in the middle of 
the fore-noon and one in the afternoon. It was 
discovered that thirty-five girls were now able to do 
the work which once required 120 girls. 

H. L. Gantt tells of a bleaching plant where be- 
sides forty-five minutes for lunch, the girls were 
allowed two forty-five minute rest periods during the 
day. The work was extremely fatiguing and Gantt 
suggested that the day be divided into working 
periods of one hour and twenty minutes each, sep- 
arated by twenty minute rest periods, while spare 
hands filled in during the intervals. The result was 
a better spirit, better health, and an increase of 60 
per cent in the output. 

Other Considerations. It is not sufficient that the 
worker be given ample time for recuperation; luiless 
this time is wisely spent, the leisure period may leave 
him less fit than it found him. The manager has a 
direct interest in the kind of pleasures that attract 
the workers and in the morality and the intellectual 
life of his employees. How managers aid their em- 
ployees in improving themselves, in cultivating 
habits of thrift, and a high standard of pleasures will 
be described in the next two chapters. In the same 
chapters will also be studied the methods used to give 
the workman a vital interest in his own efficiency 
and in that of his fellow workers. 

Summary. The manager brings together the vari- 
ous elements of production and organizes them into 


a working and producing organization. The ef- 
ficiency of this organization depends largely upon 
the willingness on the part of the workers to co-oper- 
ate and upon the efficiency of the physical plant. 
The problem of management is primarily a human 
problem. Management resolves itself into the follow- 
ing questions : How must the work be divided among 
the personnel? Who shall bear the responsibility for 
the different functions? How shall the efficiency of 
each man be controlled and increased? Different 
types of internal organization are found. The line 
organization is most common. This may be modified 
by adding planning departments, or by a subdivision 
into many smaller departments. Scientific manage- 
ment is another type. This rests on the application 
of the laboratory method to industry, and on the 
sepciration of all work into functions. No method of 
management is successful which neglects to take full 
account of the human factor. 


W. C. Redfield. The New Industrial Day. The Century 

E. D. Jones. ' The Administration of Industrial Enter- 
prises. Longmans, Green, and Company. 

J. C. Duncan. The Principles of Industrial Management. 
D. Appleton and Company. 

H. Diemer. Industrial Organization and Management. 
La Salle Extension University. 


C. C. Parsons. Office Organization and Management. La 
Salle Extension University. 

D. S. Kimball. Plant Management. Alexander Hamilton 

H. L. Gantt. Industrial Leadership. Yale University 


1. What is meant by the line and staff organization? 
Duncan. Chapter XIII. 

Parsons. Chapter I. 

2. What are some of the criticisms of scientific man- 

Reference: Duncan. Chapter XIII. 
Jones. Chapter VII. 

3. Do high wages always mean high costs? 
Reference: Redfield. Chapters II, IV, V. 

4. What is meant by democratizing industry? 
Reference: Gantt. Chapter I. 

5. In what respect does the scientific attitude differ 
from the traditional method of approach to business prob- 

Reference: Jones. Chapter I. 

Redfield. Chapter I. 


1. What is meant by a production order? 

2. What are the fundamental principles which must be 
observed in all systems of management? 

3. Why is it desirable to install a planning department 
in a factory? , 


4. How is the shop organized under scientific manage- 

5. Can you explain how the principle of functional 
management would work out in the management of a 
baseball game, or of a dramatic performance? 

6. Most people give little thought for the future. 
They do not look far ahead.' Suppose that you were 
asked to apply the method and principles of scientific 
management to securing the greatest efficiency in the 
management of your own life; how would you proceed? 




What the Employer Buys. In the preceding chap- 
ters_ we saw that more and more business men are 
beginning to be convinced that it is possible to 
analyze work in the shop and even in the office and 
to discover how to do a piece of work with maximum 
efficiency. The employer's next concern is with the 
willingness of the employee to break away frqm old 
habits and to learn to work according to new 

The first method that suggests itself to secure the 
co-operation of the workingman is to give him an 
interest in the output. He must be made to realize 
that his earnings depend upon his performance. This 
opens a fundamental question in the wage situation, 
namely, "What does an employer buy when he hires 
a workingman?" 

He Buys a Workingman' s Time. The Day Wage. 

Some claim that he buys the workingman's time. 
This is the point of view that lies at the bottom of the 
old day wage, i. e., every mjui receives a daily wage 
irrespective of the amount of work he does. He 
checks in in the morning and checks out in the even- 


ing, and he receives pay according to the number of 
hours he spends in the plant or store. 

The advantages of the day wage are easily seen. 
It is simple and it assures the worker a regular in- 
come. He may, therefore, adjust his standard of 
expenditure to his wage and feel fairly certain that 
he can meet his bills as they fall due. 

The disadvantages are equally apparent. It is im- 
possible to give a real incentive for good work to the 
workingmen. They all receive a day wage and this 
WEige is determined by the kind of work demanded of 
them with no definite relation to the amount they 
do. It is to the interests of the management to make 
the workingmen work as fast as possible, but the 
interests of the workingmen are directly in opposi- 
tion to this. He is anxious to work as little as he 
can for the wage he receives. Some few really good 
workmen who like to be active, who get pleasure out 
of work for its own sake, are exceptions, but most of 
them must be driven to work. 

Employers, therefore, introduce all kinds of 
schemes to make their men work. They adjust the 
production centers so delicately that the machine- 
speed forces men to keep up a certain rate of speed. 
They introduce more highly paid workmen who set 
the pace. They pay high wages to foremen who 
know how to "get the work out of the workmen." 
They allow these foremen the power to hire and fire 
the workers and to hold the fear of discharge over 


their heads as a weapon. The workmen dealt with 
in this way naturally feel more or less resentful. 
Many of our industrial disturbances may be directly 
traced to this situation. The most objectionable 
feature of the old-fashioned method of payment is 
that workmen are dealt with in a group. A man is a 
carpenter or a bricklayer or a rigger, and the wage he 
receives is the wage of the group.^ As an individual 
he is nothing. If he is anxious to increase his earn- 
ings or shorten his working time, he must combine 
with others in his group to press the demand. The 
employer, therefore, is to a large degree himself re- 
sponsible for the power of the labor unions, the exist- 
ence of which many employers deplore. 

The unions have made the weaknesses of the old 
system of management their strength. By paying 
men a group wage, their group consciousness is 
awakened and their solidarity increased. When 
changes in the method of payment are proposed, 
unions usually resent them for in community of inter- 
est lies the strength of their organization. 

The fact that the good worker receives the same 
wage as the poor worker means that in the actual 
wage some kind of compromise is struck in which the 
good man receives less than he is worth and many 
poor men receive much more. The good worker re- 
sents this situation but sees no way out, for he feels 
that only by solidarity can he hope to maintain his 
position. The poor worker is constitutionally a mal- 


content. Most poor workers are; they are usually 
unwilling to admit their own shortcomings and seek 
to shift the blame upon others. We all know this 
type of person. When skating, playing tennis, or 
running it is never he that loses the match. His 
skate was out of order or the balls were old, and some- 
one ought to fix up that track. The good sportsman 
plods along without complaining and wins the race. 

The employer should not be satisfied with the day 
wage, not only because it does not supply the right 
kind of motive for work, but because he bears all the 
losses that result from disloyalty and laziness. The 
fact that he receives all the benefits of conscientious 
effort does not quite offset the disadvantage that he 
is never certain what a job is going to cost. 

He Buys Output. The Piece Rate. The principal 
defects of the day wage are that it does not give an 
incentive for work and that the interests of the work- 
man and employer are antagonistic. Many em- 
ployers have hoped to remedy these defects by paying 
not according to time spent but according to the 
number of units of output. In other words, they pay 
a piece rate. They pay so much for every piece pro- 
duced jvhereby the total earnings of a workman de- 
pend entirely upon his productivity. 

This method of payment has many advantages. 
The workman now knows that his earnings depend 
upon himself; he will work faster and with greater 
interest in his work. The employer gains in two 


ways. He gains first of all in that he knows what 
the wage cost will be of each piece produced. In the 
second place, he gains because the greater the 
amount produced in his factory the less each unit 
of output bears of the total overhead or general ex- 
pense of the plant. 

Both employer and employee have an interest, 
therefore, in large output. In so far their interests 
are parallel. It is not necessary to have a pace- 
setter or driver in such a factory, and this helps to 
create a better feeling between employer and em- 
ployee. In place of the drivers it is necessary, how- 
ever, to appoint inspectors to scrutinize carefully all 
work produced, for workmen when paid by the piece 
may increase quantity at the expense of quality. 

There are objections, however. The workman Is 
not assured a minimum day wage. He is, therefore, 
somewhat in uncertainty in regard to his earnings, 
though this is no very grave objection. There are 
other reasons why workmen generally oppose this 
method of payment. One of the most commonly 
found objections is the one that it breaks down the 
union. This cannot be denied. The solidarity of the 
group is endangered as soon as the group wage is 
done away with. Men become individuals, dealing 
with their employers and receiving a wage set by 
their own output with little reference to others per- 
forming the same work. Nevertheless powerful 


unions are found in trades in which a piece rate is 
the prevailing method of payment. 

The most serious objection is based on the fear that 
the rate will be cut. This fear is not unfounded. 
Many shortsighted managers have used the piece rate 
plan merely as a means of finding out how much a 
workman could prodiice only to cut the piece rate 
enough so that the total rate received for the maxi- 
mum output was no more than the original day wage. 
Through such unfair practices, the workmen's suspi- 
cions of the motives of all firms installing a piece rate 
have been aroused and the benefits of piece rates have 
been much lessened. The fear of the rate cut often 
induces workmen to continue their policy of soldier- 
ing even under the piece rate plan, so that the em- 
ployer may not discover their maximum capacity. 

Need for Accurate Information. Not all employers 
who have cut rates have done so as a part of a definite 
plan of deceit. They feel justified in so doing be- 
cause the difference between the piece rate wages and 
the old day wage showed them how grossly negligent 
and lazy their working men had been in the past. A 
piece rate based upon the output under day wages 
often leads to a wage three or four times the original 
day wage. Nothing will destroy the confidence of 
the workman in the management so completely as a 
cut in the piece rate. This must at all cost be avoided. 
The only way to arrive at a piece rate which need 
not be cut is to determine the normal output of 


workmen before setting the rate. In other words, a 
piece rate cannot be set by guess work or by a ma- 
jority vote, but must be set after a careful study of 
the work. The work should be analyzed; the best 
way should be discovered; the tools and methods 
standardized; and the time which the work should 
take determined. The piece rate may now be set with- 
out fear that a cut may later be thought necessary. 

Co-operation between Employers and Employees. 
The question is often raised whether employees 
should have a voice in the setting of the piece rate. 
As long as the actual working time required for work 
is not accurately known, one man's guess is as good 
as another's. Once the time required has been de- 
termined by an elaborate process there is little room 
ileft for argument. The only question left for argu- 
ment is whether the day wage, made possible by a 
normal amount of work according to the standard- 
ized methods and the piece rate set, is sufficient. 
Once the normal day wage is agreed upon the piece 
rate is then quickly determined, but unless both the 
normal daily earnings and the normal amount of 
work are determined in co-operation with the workers 
it will be difficult to convince them that everything 
was arrived at fairly. Co-operation in the determina- 
tion of time, task, and rate holds out the greatest 
promise for industrial peace. 

It is no easy matter to determine the time required 
for a certain piece of work with accuracy and fairness. 


It must be plain that the output which was normal 
under the old day wage forms no standard, for the 
time required fgr each unit of output contains a 
large amount of time spent in "soldiering." How to 
eliminate this dead time is the problem which now 
confronts us. In most factories the managers are 
satisfied if they secure the co-operation of a few of 
the higher grade workmen. After determining their 
average time the piece rate is set with reference to it. 
Usually the rate is set a little higher so that it may 
not work a hardship upon the less able workmen. 
Such a method is not absolutely accurate but is 
accurate enough for most purposes. 

He Buys Output and Time. The Task. Some 
hold that the employer buys both time and output. 
Maximum efficiency cannot be attained unless every 
element in the factory is keyed up to a high pitch of 
work. The employer is interested in large output 
because it cuts his overhead charge per unit of output. 
In terms of labor this means that he can only afford 
to employ men who possess a certain amount of 
productivity. He must therefore make it worth 
while for all men to reach a normal amount of 
output, or task. 

The best method of payment, so they claim, is to 
pay a workman a certain rate per hour; this assures 
him a steady income. This rate is made low for all 
who fall below the task and high for all who reach 
the task and who exceed it. A similar result may be 


obtained by paying two different piece rates, one 
the lower, to men falling below the task, and another, 
a higher rate, to all who attain or exceed the task. 

In each case the rate would then be arranged in 
such a way that any workman not reaching the task 
would make only a very moderate wage while those 
reaching the stcindard of efficiency set are rewarded 
quite liberally. 

To give an example. Suppose that a piece of work 
should take four hours to perform, and that the 
rate per hour for a workman who reaches this normal 
rate of output is fifty cents per hour ; then the slower 
worker may not receive more than twenty-five or 
thirty cents. In fact the hour wage may grow 
smaller and smaller the less efficient he is. This 
seems not unfair in principle. From the employer's 
point of view it is logical, for a slow worker means 
an inefficient use of machinery, tools, and working 
space, and an accumulation of goods in process and 
consequently an increase in the overhead burden. 

A different problem is introduced when the rate of 
pay above this normal task is set. Suppose that the 
workman succeeds in finishing two pieces in the time 
set for one. What ought the hour rate to be? 
The workmem may well argue, "The normal cost to 
the factory which is considered fair, is fifty cents 
an hour for a four-hour job, or two dollars for the 
job. In case I, through my greater energy and 
efficiency, succeed in making two pieces in the same 


time, I should receive two times two dollars, or four 
dollars, for these four hours. The cost of each piece 
to the factory would still be two dollars and my 
employer would receive the benefit of an additional 
saving in overhead." 

This indeed sounds logical, and corresponds to the 
view taken by some managers. Others, however, 
remark against this. "This reasoning holds good only 
if we agree that you are selling me your output when 
I hire you. Now I believe that output is something 
you caimot very well sell, for it is something in 
which I work with you. I supply the machines, the 
place to work, and the raw material. I carry on 
laboratory experiments to discover the most efficient 
methods, and I take the trouble to teach you. I 
don't deny that you are worth more to me when you 
do good work than when you loaf. That is the reason 
for my paying you higher wages as your efficiency 
increases, but I am not going to give you all the 
saving that results from your better work. That is 
what you ask when you say: 'Pay me two dollars a 
piece after I reach the task.' 

"I also admit that you must be paid something 
extra for cutting the time set. I contend that we 
should divide this saving between us. You ask why? 
Because I am not buying your output, which, as I 
explained, is not yours; I am buying your time. 
You have come to work for me a full working day. 
If you can finish two pieces in a half day while some 


other man needs a whole day to do as much, that 
does not mean that the rest of the day is all yours. 
You are still working on my time and benefiting by 
my co-operation." 

Many wage schemes have been devised to bring 
about a method of wage payment which would 
satisfy this latter argument. One of these methods 
is in short as follows : A day wage is guaranteed to 
every workman. Those who attain a moderate task 
receive a part, say one half of the wages of the time 
saved. For instance, a workman earns thirty cents 
an hour, and is asked to do a task normally requiring 
eight hours. He performs this task in six hours. 
His earnings would then be: 

6 X 0.30 = $:. 80 which is his pay for the time 
worked, plus yi x 0.60 = 0.30 which is his share in 
the saving in the cost of labor, or a total of $2.10. 
This he earns in six hours which means that his hour 
rate has increased from thirty cents to thirty-five 
cents. If eight hours constitute a day, his day wage 
would be increased from $2.40 to $2.80. This 
method of payment was proposed by F. A. Halsey, 
a manufacturer of Sherbrooke, Canada, and is 
spoken of as the Halsey plan. 

There are many other similar wage plans such as 
the Rowan premium plan, the Taylor differential 
piece rate system, and the Emerson efficiency wage. 
These different methods of payment all have one 
thing in common, i. e., they set a task, and the wages 


received by the workmen are determined with refer- 
ence to the task. They differ mainly in three respects. 

1 . The method according to which the task is determined. 

2. The degree to which the workman is allowed to share 

in the savings. 

3. The degree to which the workman is penalized for not 

attaining the task. ' 

Some of these wage payment plans, such as the 
Taylor differential piece rate and the Emerson 
efficiency wage, give the entire savings to the worker. 

Other wage systems give a portion of the sav- 
ings to the management. 

Setting^ a Task. The setting of the task now be- 
comes a matter of great importance. It is quite 
important under a piece rate plan, but it becomes 
even more so when all those not reaching the task are 
paid but meager wages and a substantial increase is 
allowed as soon as the task is reached. In fairness 
to all concerned, both employees and employers, a 
task should be set accurately and fairly. A scien- 
tifically determined task is therefore the first requisite 
for the satisfactory operation of any of these more 
elaborate wage systems. 

The Taylor system of payment places more em- 
phasis than any of the other wage systems upon an 
accurately set task and upon the attainment of it 
by the workmen. The other wage systems allow a 
greater degree of elasticity. The Taylor system is 


therefore workable only where a complete system of 
scientific management is installed and a task is set 
after careful time studies of the standard performance 
of well-trained workmen. When making such time 
studies, assistants with stop watches time accurately 
every separate operation as performed by the 
workmen who are being studied. 

A time study of the various elements which 
together constitute a complete operation is called an 
elementary time study. From the data obtained by 
this study the task is calculated. Studying each 
element separately instead of timing the working 
period as a whole leads to better results. First, 
because any attempt to stretch the time in any part 
of the work is more easily detected, and second 
because this information may now be filed away and 
may be used later to calculate the time for other 
pieces of work which, though different, require many 
of the same operations. 

Where no attempt is made to maintain scientific 
management, tasks are often determined according 
to the average past performance of the better grade 
of workers. This is not accurate but is quite work- 
able provided the difference between the earnings 
of those who achieve and those who do not achieve 
the task is not made too large and too abruptly. 

Summary of Wage Payments. To summarize the 
whole matter in a few words. There are various 
ways of paying workmen: the day wage which is 


based on time ; the piece rate wage based on output ; 
and a number of payment plans which are built 
around a more or less carefully set task and which 
in theory at least, recognize both the time and the 
output as a basis for.payment. 

In general that method of payment is most desir- 
able which calls forth the greatest degree of co-opera- 
tion between the workers and the management. It 
cannot be said that any one method of payment is 
the best, for circumstances, the type of management, 
the type of workmen, and the character of the 
industry will determine which method is best 

The Demand for Standardized Conditions. In the 
preceding chapter we mentioned the need for 
standardization of working conditions. At that time 
it was probably not clear why the standardization 
was of such great moment. This ought now to be 
clear. The workman who is asked to work under a 
method of wage payment which calculates his earn- 
ings according to output, especially if a task is 
introduced, has a very vital interest in the conditions 
that surround him. He reasons somewhat like this: 

"That plan appeals to me for it makes it worth my 
' while to do the best I can, and the better I do, the 
more I earn. That strikes me as fair. There is one 
thing I want to make sure of, though. It would not 
be fair to have me suffer a loss in wages because your 
machines are out of order, or because you do not 


have the raw material ready in the proper place and 
at the time when I need it. How can I reach my 
task, how can I increase my output, when I have to 
run all over creation to find my tools? In all fairness 
to me the management must see to it that I have the 
right kind of raw material at the right time, and that 
all these things are in good condition." 

This is the thought back of the demand for 
standardized working conditions. This demand is 
very reasonable and fair. The system of manage- 
ment which we have called scientific management is 
based on the recognition of the justice of this de- 
mand. In short it means : 

1. Discovering the right standards with scientific accu- 


2. Maintaining the right standards. 

3. Training thp workers to reach a reasonable task. 

4. Placing all management functions in the hands of the 


5. Rewarding the workers according to whether they 

reach the task set or fall short of it. 

The need for the functional foremen discussed 
in chapter VII, such as the repair boss, the machine 
speed boss, and the instruction card clerk is now 

The Group Bonus. Not all industries are of such a 
character that it is possible to determine the output 
of each individual. Take for example a soap factory. 
A large vat must be kept boiling for several days, 


and different shifts of men tend the fires and look 
after many small jobs about the vat. How could the 
output of one man be determined? Again, take a 
firm of house painters which sends its men out to 
paint the interiors £uid exteriors of houses. How 
much and how well does each man paint? This can 
not be answered easily, if at all. Again in an auto- 
mdbile factory some fifty men may all be engaged in 
the assembling of autos, but who can say what each 
individual contributes to the total amount? 

In such factories a group bonus is sometimes paid, 
or a group piece rate. Every workman in the group is 
then vitally interested in the output of the group. In 
many factories this method has worked out very 
satisfactorily and has resulted in a keen sense of 
co-operation between the workmen. 

Profit Sharing. All the wage payment schemes 
discussed so far are based on the thought that the 
employer hires the workmen to do a certain amount 
of work. The amount paid in wages rests upon the 
value of the work to the employer calculated with 
varying degrees of accuracy. The wage is an element 
in the cost of production. It is often desirable 
to give the workmen an interest in the success of 
the business as a whole. They are, therefore, not 
only paid a wage, as in any other business enter- 
prise, but in addition receive a share in the profits of 
the business. They appear twice on the books of the 
firm, once as an element in cost and a second time 


as a participant in the distribution of the income. 
This is called profit sharing. 

It may be said that a working man has no right 
to a share in the profits since these were secured not 
through his work alone, but through his work com- 
bined with that of a large number of others; that 
is, clerks and executives working in the offices and 
selling the goods to the customers. But this argu- 
ment does not hold very well since this is not the 
question involved. The question is how to give the 
workmen a vital interest in the concern as a whole, 
and this is frequently accomplished by profit sharing 
better than by any other plan. 

In the soap factory above mentioned and also in 
the painter's firm, individual .efficiency cannot be 
easily determined, and it is difficult to supervise the 
workers. In such a case profit sharing may prove a 
very excellent way to stimulate in the workmen an 
interest in the business. They are not so likely to 
loaf, to waste material, to turn out bad work when 
they realize that such actions result in lessened 
profits, which means a lower income to them. 

That the amount which they are to receive as their 
share in the profits cannot be calculated except once 
a year or once every six months, and that, because 
of this long period the workingmen may fail to 
realize the relation between their faithfulness and 
the share they are to receive, must always be ad- 
mitted. But on the other hand a profit sharing plan 


frequently results in inducing men to continue their 
connections with a firm longer, because they do not 
want to sacrifice their share in the profits they have 
helped to earn, by leaving the employ of the concern. 
This means that the firm secures a stable and faithful 
labor force. 

Many such profit sharing plans are in operation, 
both in this country and abroad. Very often the 
share in the profits is not paid out in cash, but is 
used to buy shares of the company, thereby making 
the workers part owners of the undertaking. Among 
the many well-known examples are the Maison de 
Claire in Paris which originated profit sharing in 
1842; the Bon Marche, also in Paris, almost entirely 
owned by its employees; the Dennison Manufactur- 
ing Company of Boston; and The Clipper Belt Lacer 
Company of Grcuid Rapids, which inaugurated a 
profit sharing plan in 1903. 

It must be clearly understood that profit sharing 
may very well go hand in hand with any of the 
systems of wage payment above discussed. 

The Wages of Store and Office Workers. The work of 
office employees and store sales people is less readily 
standardized than the work of a factory employee. 
Girls taking dictation may differ greatly in their 
output merely because one dictator is more speedy 
and makes less mistakes than another. The intro- 
duction of office machinery has aided much in 


standardizing the work of the office. The dictagraph, 
for example, places all typists on more nearly the 
same basis and makes frequent waits and inter- 
ruptions less necessary. 

The result of this increasing standardization is a 
growing tendency to pay office help according to 
output. This principle has in many offices been 
applied to the typists. Careful records are kept of the 
amount of work done by each in terms of lines of type- 
written material and of the mistakes made. 

It would never be quite fair to pay each girl 
strictly according to the result of these records. 
Office work can never be so neatly standardized. 
Some firms, for example the Burroughs Adding 
Machine Company, classify the typists according to 
groups, each receiving a different weekly wage. A 
girl remains in any group as long as her work does not 
on the average fall below 60 per cent of the amount 
of work set for the group. In case she does more 
than 60 per cent she receives a bonus. Should she 
reach 80 per cent of the task for four weeks, then she 
is placed in a group with a higher task and she re- 
ceives a higher weekly wage. The method is 
adapted to office workers because the groups very 
gradually increase their tasks, and within each group 
a girl may vary as much as 20 per cent of the quota. 

Perfect standardization or task setting is not 
feasible in a retail store. Other methods to give the 
employees an interest in their own efficiency must 


therefore be devised. In some retail stores sales 
people are paid a certain per cent of their sales. In 
other stores they are paid a straight weekly wage, 
but a record is kept of their sales, and when it is 
found that their wages are larger than a reasonable 
percentage of their sales, they are discharged or 
transferred to some other department. 

Relation of Workman to Employer. Finally it 
may be pointed out that more and more it is being 
realized that no really permanently satisfactory 
method of payment can be devised ixnless the em- 
ployees are in some way allowed a voice in setting 
the rate, and are allowed to share in the management 
of at least that part of the enterprise where they 
perform their work. 

Where a task is set they should know the processes 
by which the task was determined. Where profit 
sharing is Introduced it should be real profit sharing, 
not a gift blindly accepted, but a definite percentage 
of profits fixed In advance. Properly appointed 
representatives of the workmen should have access to 
the books, and a definite policy of income on a reason- 
able investment should be agreed upon. In short, 
both sides should place their cards on the table. 

Many factories (are endeavoring to give their 
workmen a genuine voice In the matter? of pay and 
working conditions by the establishment of commit- 
tees of which executives and representatives of the 
workmen are members. This Is a hopeful sign that 


the new industrial day is breaking, in which capital 
and labor will be partners in fact and in spirit, and 
not only in name. In such reforms lies the hope of our 
industrial civilization, for in the words of President 
Wilson in his address of May 30, 191 9: 

'We cannot go any further in our present direction ; 
we have already gone too far. We cannot live our 
right life as a nation or achieve our proper success 
as an industrial community if capital and labor are 
to continue to distrust one another and to contrive 
how they can get the better of one another." 

Summary. The workman may be looked upon 
from two angles. He may be considered as selling 
his ability arid strength to the concern. Or he may 
be looked upon as a partner. The first concept is 
best illustrated in the day wage ; the second finds its 
best expression in profit sharing. Between these two 
extremes there are a number of other possibilities 
which recognize both principles. The tendency in 
business is more and more to pay men according to 
their ability and to give them an increasingly impor- 
tant share in the control of the concern. 


The same as the preceding chapter. Additional reference : 
J. W. Schulze. The American Office. Key Publishing 



1. Draw charts showing: 

(a) The cost per piece under the day wage with 

varying output 
(6) The cost per piece under a piece rate with 

varying output 
(c) The hour rate of the workmen in each case 
Reference: Jones. Chapter XIII. 

2. What are the principles of task work? 
References: Gantt. Chapter III. 

Schulze. Chapter VIII. 

Parsons. Chapters VII, VIII, IX. 

3. What is scientific management? 
References: Jones. Chapter VII. 

Gantt. Chapter III. 
Duncan. Chapter XIII. 

4. WYvat is a. fair day' s work? 
References: Jones. Chapter XII. 

Gantt. Chapter IV. 


1. What are the advantages and disadvantages of a 
day wage? 

2. If you had the choice, under which method of wage 
payment would you prefer to work? 

3. Why do workingmen often object to the piece wage? 

4. What argument lies back of the demand for 
standardized working conditions? 

5. What is meant by a task? And how may a system 
of wages be built around the task? 

6. What is a group bonus? 

7. What type of undertakings are particularly adapted 
to a profit sharing plan? 




What Is Incltided in the Service Department? In 
many factories and stores several functions are 
grouped under the name service department. The 
following offices are usually included : 

1. The employment office 

2. The educational office 

3. The health office 

4. The welfare office 

The general term service department is coming 
into use quite generally for it not only describes the 
purpose of the department accurately, but it is to 
be preferred to welfare which always carries a 
suggestion of charity. 

The Employment Office. The employment office is 
in charge of the hiring and discharging of workmen. 
Such an office is by no means found in all business 
houses but there is a growing realization of the 
benefits which result from its establishment. 

In most business concerns the hiring and firing is 
done by the foreman or, in the office, by some 
departmental head. This is very inefficient. One of 
the fundamental requirements in an efficient orgain- 


ization is the selection of the right kind of workers. 
The average business executive or foreman has 
neither the time nor the knowledge which are 
required to make a careful selection from among the 
many applicants. Everything else in a factory or 
store is usually in the hands of specialists. The shoe 
buyer would not undertake to buy the millinery any 
more than in a factory the expert salesman would 
undertaike to select the lathes for the shop. The 
employment of labor in many concerns is still looked 
upon as everybody's work and with disastrous results. 

Labor Turnover. In terms of dollars and cents the 
absence of a centralized employment department 
means a loss to the firm. During the war many 
studies were made of employment conditions in 
industries in this country with surprising results. 

It was found that most plants had practically the 
same experience. Workmen came and left again 
after a short period of employment. In order to 
supply the required number of workmen to any 
plant it was necessary to hire many times that 
number. The West Pennsylvania lines were com- 
pelled to take on 84,000 new workers during an 
eight months' period in order to keep 2,000 jobs 
supplied with men. These figures are but typical 
of a condition which even in normal times prevails 
in many industries. 

The ratio of the number of men taken on during a 
given period to the average number of employees 


actually employed constitutes the "labor turnover" 
of a concern. To give an example : 

Suppose 150 men entered the employ during the 
week, and that the number actually at work during 
the six-day week was: Monday 1 150, Tuesday 1200, 
Wednesday 1 170, Thursday iioo, Friday loio, 
Saturday 1000; then the average number employed 
during the week is 6630 divided by 6, or 1 105. 
One hundred and fifty additions a week is 52 times 
150, or 7800 a year. To keep the factory continually 
supplied with an average of 1 105 men during the 
year requires, therefore, 7800 new men or 705.6% 
of the average working force. The Pennsylvania 
lines above quoted had, according to this method of 
calculation, a turnover of Hf^xH or 6300 per cent. 

Labor Turnover an Expense. Wherever a large 
labor turnover is found, an important cause of high 
labor cost has been discovered. When a new man 
joins the working force he must not only be trained to 
do the job for which he was hired, but he must adapt 
himself to his new environment, become used to the 
location of his machinery and tools, and must 
become acquainted with the methods of the shop. 
While he is learning he is not producing his maximum 
output, and often slows down the speed of his own 
and neighboring production centers. He demands a 
larger share of the foreman's time and frequently 
spoils raw material and tools. In other words, it 
costs the shop money to train a new man. Some 


shops estimate that it costs from fifty to two hundred 
dollars to "break in" a man. 

A large percentage of labor turnover has also 
undesirable social effects. Quitting and looking for 
another, job elsewhere very soon becomes a habit 
with men. They join the army of men who are 
habitually underemployed. From part-time em- 
ployment they gradually drift into the class of 
chronically unemployed. Many causes are responsi- 
ble for excessive labor turnover : 

1. Unscientific hiring. 

2. Lack of supervision of employment. 

3. Absence of a method of discovering and encouraging 

latent talent. 

4. Lack of co-operation between departments in the 

matter of employing men. 

These various causes will now be discussed in 
detail and the part which a centralized employment 
ofhce may play in remedying these conditions will be 

Hiring Men. It is impossible to hire the right man 
for any job or position until the requirements of the 
job are accurately known. It makes a big difference 
in many jobs whether a man is tall or short, and 
whether he wears glasses, or has exceptionally good 
eyesight. Job analysis, or a careful study of the 
position to be filled, should precede any attempt to 
hire men. Detailed job specifications should then be 
drawn up. 


The advantages of such job specifications are many. 
Once all jobs in the factory are thus described in 
detail, the work of finding men for these jobs is 
much simplified. All guesswork is eliminated. The 
preparation of such specifications forces the execu- 
tives to analyze the job, and to study its requirements. 
This leads to a better appreciation of the working- 
man's problems and may often lead to the discovery 
of disagreeable features which may be eliminated or 
may bring out the justice of paying a higher wage. 
Without such detailed knowledge of the work done 
by each workman, a truly fair adjustment of wages 
and salaries is not possible. With this knowledge it 
is easy to determine whether men may be shifted 
from one job to another, and whether women, or less 
highly skilled, and therefore less expensive labor, 
may be substituted. One large manufacturing 
company uses the following card on which the 
foreman or manager is required to give the neces- 
sary information to the employment office. 



Copy for 

Dept mw Class la Job Name.. . 

All-round repair machinist 

Description of Job All-round machinist making 

end assembling repair parts 

Nature of Work and Working Conditions: 

Heavy Standing. x. .Floor jQuick.x. . .Dirty, .x. . 

Medium . x . . Sitting Bench Slow Greasy. . . . 

Bench Mach Rough .... Wet 

Light Walking Floor Mach.,x. . . Close. x. . .Clean 

Continuously Repeated Operation Or Variety 

of Jobs 

Make of Machine 

Length of Time Required to Learn Job 6 months . . . 

Rates: DW or PW dw Starting Rate. . .Average 

earnings on PW 

How Soon Put on ^iece Work 

Requirements : Schooling desired 

Necessary to Read and Write English x 

Read Blueprints x 

Tools Required Full set machinist tools 

Preferred Age 35-4S Height Weight 

ever 140 Nationality Previous Training or 

Experience Desired Experience or repair work on 

similar class of machinery 


Dept. Foreman Employ. Dept. 

Supt Date 


With such information at hand the employment 
office can select men intelligently and may readily 
shift them from one job to another, frequently 
filling new jobs that come open by transfer and 
promotion rather than by taking on new men. 

Securing Applicants. The employment department 
should endeavor to have a sufficient number of 
applications on file so that openings that arise in the 
plant may be readily filled. This is especially 
desirable where it concerns jobs requiring special 
skill or training. At every business establishment 
applications for positions are constantly made, 
either in person or by letter. Nevertheless, it may be 
necessary for the emplojrment office to make an 
active campaign for certain classes of applicants, 
for the larger the list to choose from the more 
successful the selection is likely to be. 

Employment offices may use aijy of the following 
channels to place themselves in touch with possible 
candidates; by means of advertisements in the 
newspapers, recommendations from employees, the 
schools, Y. M. C. A. secretaries, or through public and 
private employment agencies. The applicants who 
present themselves at the office or who apply by 
letter should be required to fill out an application 
blank. The object of the application blank is to 
collect information about all applicants, which will 
allow the employment office to determine the 
fitness of the applicant for particular jobs. Such 




R'l II t II 

II II irg dk.-^^)! . 
"I r'JHi>B8a<ii 

t: 1 £ am I Bin 

I « FJilllBH 





1 82 


blanks may be large sheets or cards; they are filled 
out for future reference and become part of the 
permanent record of the employee. Such an appli- 
cation card may have the following form: 

Form No. APMS 




Tel. No. 

Local Address 

Home Address 

Age Weight 

Last employed by 


Nationality ' 


Position applied for 

Length of time 

Rate Date Quit 

Years experience 

Held position as 

Also worked for 


Length of Time 

Also worked for 


Length of Time 


Can fill following positions 



The back of the card is frequently used to accumu- 
late the record of the employee's work: 


Wkm's No. 


Tel. No. 

Date started. 



Starting Rate 

Rate changed to 



Rate changed to 



Rate changed to 



Positions best adapted 

In case of accident notify 

Employed here before dept. 


Left our employ date 


Laid oflf Temp, lay off Discharged 




As will be observed the application blank gives a 
record of work with other firms and indicates other 
positions for which the applicant is equipped. 

t84 business organization 

Filling Vacancies. As the various departments of 
the concern are in need of men they send in their 
requisitions, and*the employment office will proceed 
to fill the vacancy. Where possible, such openings 
are filled from among the men already employed by 
the firm. This may mean that someone is promoted 
to a position requiring greater skill and commanding 
better pay, or that he is given the opportunity to 
work in a job more in accordance with his preference 
expressed when he was hired. 

This brings out two principles in handling men: 
Find out what they like to do, and as far as possible 
give them the opportunity to show what they can 
accomplish in the work of their choice. Men will be 
happier when doing work in which they are interested 
than when kept at uncongenial tasks. They will 
also work with better spirit in work they do not like 
as long as they know that faithfulness will be reward- 
ed by promotion to their preference as soon as the 
opening occurs. The two principles are: 

1. Let each man fee! that he is in line for promotion. 

2. Keep a record of the preferences, and fill openings 

wherever possible by transfers and promotion rather 
than by new appointments. 

It is also possible that the surplus labor in one 
department may be placed to advantage in some 
other department which is temporarily rushed. Such 
methods make for smaller labor turnover and a 


more satisfied and stable working force. Is it not 
plain now that only a centralized employment 
office can handle the employment of men efficiently? 

Selecting the Workers. In case it is necessary to gO' 
outside for candidates, a careful selection must be 
made from among many applicants. It is no simple 
matter to select the one most suited for a particular 
position from among the large number of applicants. 

Every executive likes to feel that he has excep- 
tional ability in "sizing up" men. Many of them do 
possess a remarkable ability to form a fairly correct 
judgment about a man's ability and general person- 
ality from a short interview. Many, however, make 
serious mistakes in misjudging men. The question 
may be asked whether there is a scientific way of 
selecting men. The answer is that rapid strides are 
being made in that direction, but that as yet no 
absolute standards can be set up. 

Psychological tests may be given, cind are given 
by many employment offices with moderate success. 
The principle upon which such mental tests are 
based is that there are certain innate traits of the 
mind which determine mental development and 
adaptability to a certain type of work. The appli- 
cant's mental processes may be slow or quick. He 
may respond quickly to impressions from without 
or may be very slow to react ; he may remember more 
readily things heard than things seen; he may be 
inclined to careful analytical thought rather than to- 


quick action. The tests of the psychological labora- 
tory as used in the personnel service of the United 
States Army and in many private firms, make it 
possible to discover these fundamental traits. Too 
much depends, however, upon the skill of the one 
giving the test to make the results reliable except 
when procured by experts. Hence, a general use of 
these tests is not to be recommended unless con- 
ducted by carefully trained men. 

A special warning is not out of place against the 
many fake schemes which are advertised by corre- 
spondence schools and book companies as infallible 
methods of reading character. The shape of the 
nose or a bump on the forehead of the applicant 
has no more to do with his character and mental 
ability than the position of the moon and the stars 
at the date of his birth. There is, at any rate up 
to the present, no truly scientific basis for any 
of these character reading schemes. 

In each emplojonent office there should be one or 
more interviewers who have a good knowledge of 
the various jobs that are to be filled. The education 
of the candidate, his general appearance, his method 
of approach, the way in which he answers questions, 
the record of his work before making application, 
may all lead to a basis for a fairly good guess regard- 
ing his general character and skill. 

Vestdbule Schools. Where young and inexperienced 
help is hired or where the work of the factory or office 


is highly specialized, it is usually necessary, and 
always desirable, to give the employee a shorter or 
longer period of training. This training in what are 
sometimes called vestibule schools has two advantages : 

1 . The employee receives instruction in specialized work 

and becomes therefore more quickly adapted and 
more highly skilled than some one who is left to find 
his way independently. 

2. The elimination of the poor worker j of the man who 

applied for a job for which he is not fitted, takes 
place before he enters the factory. He is under close 
supervision in the school and any deficiency is 
quickly detected. Such men are not necessarily dis- 
charged, but may be directed into some other line of 
work for which they are better adapted. 

Mr. H. E. Miles of the Council of National 
Defense investigated a number of industries. In 
describing the training room or vestibule school 
established by one of these, he says: 

The test of it is that of those who enter this factory 
only two or three per cent leave. About ten per cent 
are eliminated in the training room — the perfect place for 
elimination. The production of the training room work- 
ers in this factory is not far from twenty-five per cent 
greater than the untrained from the employment office. 

It should be understood that these schools differ 
from schools in the ordinary sense in that all work 
performed is on a production basis; they are a part 
of the factory itself. 


Introducing the Employee to His Surroundings. 
One very essential aid in making the employee a real 
member of the company is to explain to him the 
organization chart of the company. He may then 
understand his relative position, and will also have a 
better grasp of the importance of many details 
and much "red tape" which otherwise he would not 
be able to understand. 

In addition to this general information about his 
place in the organization, he should receive written, 
instructions pertaining to his particular job. Many. 
Jarge firms, such as the Ford Motor Company, the 
National Cash Register Company, and the Alexander 
Hamilton Institute, have prepared attractive book- 
lets which are given to new employees, in which the 
functions of the different departments, the policies 
of the company, the rights, duties, and privileges of 
employees, and the duties of the new employees are 

Record of Service. After the workman or office em- 
ployee has been allowed to enter the employ defin- 
itely, it is necessary that a careful record be kept of 
all transfers, changes in rates, sickness, tardiness, 
and other information concerning him which in the 
future will be helpful as an aid in determtntng the fit- 
ness of the employee for the position he occupies or 
for some other position higher up. This information 
may also lead to the discovery of important facts. 
If the amount of sickness or tardiness, or the number 


of accidents in one department far exceed that in 
another, an investigation may disclose conditions 
which, when remedied, will raise the general efficiency 
of the plant and will give the workers more adequate 

Investigation of Grievances. Where a centralized 
employment office is maintained, the authority of 
firing is taken out of the hands of the foreman or of 
departmental heads. This makes for greater har- 
mony in the organization and a better feeling of 
fellowship. The foreman is no longer an absolute 
monarch. There is a direct appeal for any man who 
feels that he has a just grievance. The employment 
office makes investigations of complaints, whether 
they concern material conditions or persons, and en- 
deavors to bring about friendly agreements in dis- 
putes and to eradicate evil conditions. The employ- 
ment office should obtain the confidence of the em- 
ployee as a fair arbitrator in disputes. 

A Check on Labor Turnover. The work of the em- 
ployment office should result in a lessened rate of 
labor turnover. All men recommended for discharge 
should be interviewed and their record since the be- 
ginning of their employment looked up. The em- 
ployment manager should ascertain why the em- 
ployee was recommended for discharge, and the em- 
ployee should be given an opportunity to state his 
case. Where inefficiency is the cause, a study of the 
man's record should be made to ascertain whether 

I go 


circumstances beyond the control of the employee 
may have been to blame. Bad health, family trou- 
bles, financial worries, or an antipathy for the fore- 
man or some coworker may lie at the bottom of the 
whole trouble, or it may be that the man is working 
at an uncongenial task. In such cases a transfer to 
some other kind of work may save the man from dis- 
charge to the great benefit of his own future, of that 
of the organization, and ot society. When discharge 
is necessciry, a record should be kept of the discharge. 
The accumulated facts may aid sometimes in tracing 
a hidden source of trouble and in eradicating it. The 
following is a discharge blank used in one large 
western plant: 








pm^ — 



"— *• »""• 


















The employment office may also be instrumental 
in creating a better spirit in an organization by exer- 
cising thoughtfulness in regard to the many details 
of the relation between employer and employee 
which often are a fertile ground for friction. Such 
matters as the technique of wage payment are fre- 
quently looked upon as unimportant. From the 
workingman's point of view it makes quite a differ- 
ence whether he is paid in cash or by a check, which 


he may have difficulty in cashing except at some 
saloon or store, and then frequently at a heavy dis- 
count. These and a large number of other details 
are frequently overlooked, to the great detriment of 
an organization. The efficiency of a business estab- 
lishment, of an army, of any organized group of hu- 
man beings is determined by the morale, and the 
morale is shaped by a multitude of petty details 
which make life a burden or a joy. 

The Educational Office. The work of the employ- 
ment office is supplemented by that of the educa- 
tional office. This office will usually take charge of 
the preliminary or "vestibule" training of the new 
employees, and will attempt to raise the intellectual 
level of the entire body of workers. Popular, illus- 
trated lectures on current topics, evening classes in 
grammar school and high school subjects, and special 
vocational training are some of the more commonly 
found activities. 

The General Electric Company, the National City 
Bank, Wanamaker's Department Store, W. R. Grace 
and Company, exporters, are examples in different 
commercial fields of firms which maintain special 
training classes. Originally started to give highly 
technical and specialized training, such schools have 
gradually come to the realization that general infor- 
mation and intelligence are quite as necessary as the 
purely technical training. For this reason many 
of these schools are now supplementing their technical 


work with lectures on general sociology, philosophy, 
art, economics, and literature. These corporation 
schools have formed a society called the Association 
of Corporation Schools. 

For the benefit of those interested in technical lit- 
erature a technical library and a number of trade 
papers and technical magazines may be placed in a 
reading room, where, during the lunch period, a few 
profitable minutes may be spent. A circulating li- 
brary is also frequently found. In many plants the 
educational department publishes a paper or maga- 
zine, where, besides interesting items about events 
and persons, much valuable information about the 
processes, policy, and marketing methods of the 
firm are given. 

In some cases the educational work in hygiene is 
also in the care of the educational department, 
though in many plants this work falls under the care 
of the health department. 

The Suggestion Box. Another important activity is 
frequently carried on by the educational department, 
namely, the administration of the suggestion box. 
In order to encourage the employees to take an inter- 
est in their work they are asked to make suggestions 
to the management. The suggestions are placed by 
the workmen in envelopes provided for that purpose 
and deposited in a box. Once a week these boxes are 
emptied and the suggestions examined. 


In some factories a special suggestion committee 
composed of both executives and workmen investi- 
gates these suggestions. In other concerns the edu- 
cational department is in charge of this inspection. 
Usually the heads of the departments affected by the 
suggestions express their opinion concerning their 
value. Usable suggestions are rewarded, sometimes 
by money rewards and sometimes by privileges. In 
one large eastern book publishing house all successful 
competitors are guests of honor at an annual ban- 
quet, and their prizes are handed to them at that 
time with an appropriate address by the general 

Many large department stores have the suggestion 
system. One large store in Seattle has found it very 
helpful and a number of improvements have resulted 
from its introduction. Such suggestions as to pro- 
vide the trucks with rubber wheels, to change the 
position of a counter to allow for better light, to re- 
arrange the receiving room — all dealing with small 
but important details, were the results of the sugges- 
tion system. 

Health Department. Another very important de- 
partment in the service group is the health depart- 
ment. The duties of this department are to give all 
new applicants a physical examination in order to 
determine their general condition of health and to 
locate any physical defects which they may have; 
to make periodic examinations ; to provide treatment 


in all accidents and in some surgical and medical 
cases ; to co-operate with the safety department in 
establishing better sanitation, and as far as possible 
to render work safe. 

The health department may also render valuable 
service in the drawing up of the job specifications. 
Many jobs do not require fully able-bodied men. By 
means of carefully prepared job specifications men 
who otherwise would have been judged physically 
disqualified may become valuable workmen. 

Safety and Sanitation Department. Another step in 
the direction of true efficiency is observed in the es- 
tablishing of a safety and sanitation department. It 
is not necessary to explain in detail the duties and the 
work of such a department ; its most important func- 
tion is the elimination of industrial risk. 

In this work the department will need the hearty 
co-operation of the engineering department. Some 
changes in the machines, small outlays for railings, 
for screens to cover exposed gears, and even for a 
quart of white paint with which to brighten up a 
dark comer may often save life and limb. A sugges- 
tion box maintained by the department often leads 
to valuable improvements. 

One of the important phases of the work is to teach 
working men the value of safety devices. It is curi- 
ous that many of them deliberately cast aside safety 
devices, and prefer to run the risk of injury or death. 
Many accidents that occur in the building of sky- 


scrapers result from the refusal on the part of the 
workers to use the safety appliances placed at their 

Welfare Work. The responsibility of the employer 
is not confined within the walls of the office or fac- 
tory, nor would it be to his advantage to consider as of 
no interest to him how the employees live and spend 
their leisure, and whether they lay away something 
for their old age. Happy, enthusiastic workers can- 
not develop where home conditions sap the vitality 
and attack the morals of men and women. Poorly 
ventilated houses, lack of good nourishment, even- 
ings spent at carousing and drixiking instead of in 
wholesome amusement, mean inefficient, listless 

Many large corporations, realizing the importance 
of aiding their employees to attain and maintain 
good living conditions, provide wholesome recreation 
for them, establish building and loan funds from 
which the workers may borrow in order to build 
their homes, establish stores which supply the em- 
ployees at cost, and encourage their employees to 
save by establishing a savings bank at the plant. 

Some companies, like the Sunlight Company near 
Liverpool, and the Pullman Company near Chicago, 
have built model workingmen's villages. Here 
moderately priced cottages with ample gardens have 
been built by good architects. The workmen may 
rent these houses at a low rent and may often allow 


the rent to apply on the purchase price. The Ford 
Motor Company, the Jeffries Manufacturing Com- 
pany in Columbus, and a long list of the most pro- 
gressive companies in this country and Europe, have 
undertaken work of this kind. The establishing of 
insurance funds in which the employees may, or in 
some cases must, insure themselves against sickness, 
accident, and old age, is also becoming more 

There seems to be a growing tendency to take this 
welfare work out of the hands of the management 
and to place it in the hands of co-operative under- 
takings made up of employees, with possibly a small 
number of the firm's executives as advisors. This 
method is better adapted to American conditions 
than the paternalistic plans copied from European 
countries. The American workingman does not like 
to feel that he is being made the subject of charity. 
He is more or less suspicious of the management 
which introduces welfare work, because he sees in it 
a confession that wages are not sufficient to supply 
the worker with anything besides necessities. The 
co-operative undertaking, under guidance of the ser- 
vice department, seems to hold out the greatest 
promise of success. As an example of such a co-opera- 
tive association, the following organization chart of 
an association founded in 191 5 in a large department 
store on the Pacific coast is here given. 


I Ppeaioeifr j [vicEPBEgioeMT] 

[ COHmUTTeg*'] 


I . .I 



g |riK^,.d l-tL....| 

I Boor I JdfnefitI leOOPEOAIrVtl 

I [^ 1^^ e™2Z3 

The aim of this association as stated in its consti- 
tution is "to increase efficiency, to add to social op- 
portunities, to create and sustain a just and equitable 
relation between employer and employee." 

This store, at one time known as having the largest 
labor turnover of any in the city, through its cen- 
tralized employment service, its educational work, 
and through its co-operative association, has com- 
pletely changed the spirit of the store. The labor 
turnover has constantly decreased during the last 
three years. Patrons who have traded at this store 
for years are enthusiastic about the change in the 
atmosphere. The clerks have caught the spirit of 
service, they have the interest of the concern at 
heart, and they have confidence in the fairness and 
reasonableness of their employers. They speak of 
the store as "their" store, so thoroughly has the new 
spirit done its work. The soulless organization in 
which the employees were members, scrapped if un- 
satisfactory, retained if profitable, has been changed 
into a family of workers, enthusiastically working for 
the success of the store, proud of their work as a ne- 



cessary part of that success, and permeated with a 
spirit of mutual helpfulness which has made the 
store the most popular in the city. 

The following chart gives a complete picture of the 
various functions of a service department. This 
chart was prepared by Dr. R. S. Quinby, Service 
Manager of the Hood Rubber Company : 







•n^.i- ~.nca ' 












--—" — 

Summary. Centralization and control of the work' 
ing force makes for greater efficiency and secures a 
more stable body of workmen. Many functions 
which supplement the employment office are grouped 
with it under the service department. 


The employment office is the most important of 
these service offices. The labor turnover, with its 
social and commercial losses, is diminished as a re- 
sult of a study of its causes and the elimination of 
many of them. The employment office studies both 
applicant and boss, brings the two together, starts 
the workingman out and is always ready to aid him 
in making good. Transfers and supplementary edu- 
cation take the place of discharges. 

The educational, health, and safety offices are also 
of great importance, while the welfare work aids 
greatly in stabilizing the working force by establish- 
ing pleasant surroundings at home and higher ideals 
in education and amusements. Co-operative welfare 
work usually leads to better results than paternalistic 


Same as preceding chapters. Additional references : 

R. W. Kelly. Hiring the Worker. The Engineering 
Magazine Company. 

A Thumbnail Sketch of the Filene Co-operative Association. 
Wm; Filene's Sons Company, Boston. 

Employees Handbook of the National Cash Register Com- 
pany. Dayton, Ohio. 

American Academy of Political and Social Science, 
Stabilizing Industrial Employment. Annals of the 
Academy. May, 1917, Vol. LXXI, whole No. 160. 

American Academy of Political and Social Science, 
Personnel and- Employment Problems in Industrial 
Management. Annals of the Academy. Vol. LXV, No. 


154. May, 1916. Editors: Meyer Bloomfield and 
Joseph H. Willits. 


1. What are some of the remedies proposed for the 
waste in hiring and discharging employees? 

Referenims: Waste in Hiring and Discharging Em- 
ployees. M. W. Alexander. Scientific 
American Supplement, No. 2041, Feb- 
ruary 13, 1915, pp. I02ff. 
Kelly. Chapter XI. 
Annals of the Academy, Vol. LXXI, 
Part I. 

2. What is meant by a centralized employment de- 

Reference: Annals of the Academy, Part II, Vol. 

3. What are some of the advantages of giving the em- 
ployees a voice in the management of the industry? 

Reference: Annals of the Academy, Vol. LXXI, 
Part V. 

4. Describe how a job is analyzed. 
Reference: Kelly. Chapter V. 

5. Are many firms aware of the need of special and 
general training for their employees? Describe some 
successful vestibule school. 

References: Kelly. Chapter VII. 

Duncan. Chapter XIV. 

6. Visit some store or factory in your locality which 
maintains an employment office. Compare the blanks 
and records used in that office with those given by Kelly 
in Chapter X. Answer the' following questions : 


(a) Which blanks given by Kelly are not found in 

the office visited? 

(b) Is there any good reason for their absence? 

(c) In what respect are the blanks used different 

from those given by Kelly? 

(d) Do you see any good reason for the difference? 

Could Kelly's blanks be used without any 
7- Draw up a list of all the functions that may be 
demanded of an employment manager. 
Reference: Kelly. Chapter III. 
Study the chart at the end of this chapter. 
8. Draw up a similar list of the various kinds of wel- 
fare work that may be undertaken. 

References: Jones. Chapter XV. 

Parsons. Office Organization and Man- 
agement. Chapters XII, XIII, XIV, 

Filene's Co-operative Association. 
National Cash Register Company Em- 
ployees Handbook. 


1. Why is centralization of hiring and discharging a 
desirable thing? 

2. Why is a large labor turnover very expensive? 

3. What is meant by a job specification? Explain the 
part played by this in the management of labor. 

4. What is a vestibule school? 

5. Can you see any good reason why an employment 
office should co-operate closely with the health office and 
the engineering office? 




The Location of the Plant Demands Careful Study. 
Since the manufacturer finds his profit in the margin 
between his cost and his seUing price, he must en- 
deavor to make his cost as small as possible, and his 
selling price as high as possible. The selling price is 
frequently quite beyond his control. The price at 
which his competitors are selling and the willingness 
of the consumer to pay a certain price and no more, 
frequently determine the price at which he must sell. 
The manufacturer is, therefore, very much inter- 
ested in keeping his costs down. The location of his 
factory plays an important part in his cost of pro- 
duction. It is easy to see that it would not pay to 
build an automobile factory in the heart of New 
INJexico nor a salmon-packing plant in Detroit. But 
it takes careful study to determine whether Detroit, 
Chicago, or New York is the most desirable location 
for a lens-grinding plant. We must, therefore, ana- 
lyze the factors in plant location. 

Nearness to Raw Material. One of the reasons why 
it would be foolish to locate a salmon-packing plant 
in Chicago is because the raw material would have 
to be transported from Alaska or the Puget Sound 


region. This wouM be impracticable for two reasons. 
First of all, salmon is perishable. To be sure, it 
would be possible to ship the salmon in refrigerator 
cars, but that would be quite costly. In the second 
place, in shipping the whole salmon a lot of waste 
would be shipped. Not more than 60 per cent of 
the entire salmon is actually put in cans. To ship 
the other 40 per cent two thousand miles only to 
throw it away after arrival, is not reasonable. 

This principle explains why lumber mills are lo- 
cated within easy reach of the timber lands. In the 
process of squaring and sawing, more than 40 per 
cent of the standing tree is cast aside as waste. 
Moreover, the boards and laths are more easily 
handled than the original logs. On the other hand 
it is better to locate the planing mill near the place 
where the lumber is to be used, for in transportation 
the finished lumber would be subject to damage cmd 

We may conclude, then, that it is safe to say that 
whenever the raw material is perishable, or contains 
a large percentage of waste, it is often best to locate 
the factory relatively near the source of raw ma- 

Why relatively near? Because other factors enter 
in to change our conclusion somewhat. It pays to 
ship logs tied together by chains into huge rafts from 
Norway to the sawmills of England, Germany, and 
Holland, because the cost of towing them across 


with ocean-going tugs is much less than shipping the 
finished lumber they yield, the same distance. The 1 
relative cost of transportation must be taken into\ 

Sometimes, as in the case of iron and steel, one car- 
load of raw material makes many carloads of finished 
goods. The finished goods, moreover, pay a higher 
freight rate. In such cases it is better to bring the 
raw material to the place where the finished product 
is to be sold. 

Frequently it is possible to eliminate some of the 
waste in the raw material before starting it on its 
long journey. The concentrators in the Joplin dis- 
trict reduce the crude zinc ore sometimes as much 
as 80 per cent in weight before it is shipped to the 
distant smelters. Where more than one raw ma- 
terial is used the calculation becomes quite involved, 
but the principles here outlined apply neverthe- 

Another factor of importance is the quantity of 
raw material available. It obviously is not good 
business to build a lumber mill near a timber claim 
when the amount of timber is so small that it will be 
exhausted long before the plant is worn out. 

Nearness to Market. Some industries can only be 
advantageously located near the market where the 
finished product is to be 'sold. The reason for this 
frequently lies in the perishable nature of the finished 
product and in the relatively higher freight rates. 


We have seen that the planing mills are in this class. 
Often the industry derives a large income from the 
sale of by-products which do not bear transportation, 
or it may be that the products are produced largely 
to order, in which case nearness to the market is 
almost always necessary. The machine tool industry 
will be found near the place where the tools are used. 
It may also be that the industry depends upon the 
finished products of other industries. What are 
called "assembling" industries are usually located 
near the market. In that way they are sure of a 
supply of component parts aind avoid double freight 

Available Labor Supply. Many sections of the 
country are industrially undeveloped, not because 
they lack the raw material or the markets, but be- 
cause labor cannot be secured at a reasonable price. 
It may seem strange that labor can* be so scarce in 
some sections, while it is plentiful in others, but it is 
a well-known fact that labor does not move freely; 
is not "mobile." 

It takes a certain amount of courage to leave the 
home town and to strike out for a new place; it 
also takes money to travel. Few men have both the 
courage and the money. The result is that labor 
moves but slowly in the direction of higher wages and 
plentiful employment. The workingmen who do 
move are often single men who quickly grow restless 
sand move on again after a short stay. 


This moving labor is an expensive kind of labor 
for the employer. As we have seen in an earlier chap- 
ter, it takes time, eflfort, and money to train men for 
any occupation. Even where a man is skilled in a 
certain line of work he must be trained to fit into an 
organization so that he may perform his duties ef- 
ficiently. A constantly changing labor force is ex- 
pensive for that reason. 

Sometimes an industry may be most advantage- 
ously located where there happens to be a plentiful 
supply of the kind of labor the industry needs. Many 
a town has become the center of an important in- 
dustry because immigrants, skilled in certain trades, 
found it attractive for settlement. The pottery in- 
dustry is a good example. 

Other sections of the country will continue to be 
industrially backward because of the absence of a 
suitable labor supply. The silk industry in southern 
California and in Texas is suffering from this lack of 
labor, and will not for many years become a flourish- 
ing industry, notwithstanding the ideal climatic con- 

The Power Factor. The presence of a source of 
cheap power for the driving of the machinery of the 
factory often outweighs many other considerations. 
Before the introduction of steam and electricity as 
motor powers, factories were located near rivers and 
waterfalls from which cheap power could be ob- 


The textile industry chose Massachusetts during 
the early years of the development of this American 
industry because abundant water power was avail- 
able. To be sure, this necessitated the transportation 
of the raw cotton over a long distance, but good 
water connections reduced the seriousness of this 

The fact that the principal market for the finished 
product was in the northern states also decided in 
favor of that location. It must be remembered that 
raw cotton does not represent as large an investment 
as the finished product. It was, therefore, cheaper to 
carry the raw cotton over a long distance and to ex- 
pose it to danger of loss and damage than to place 
the factory near the cotton farm and to ship the 
cotton cloth. The labor factor also played a part, 
for even to-day the negro is not an ideal factory hand. 
He is lazy, shiftless, and does not enjoy steady work. 

In a similar manner, many modem industries are 
located with reference to the supply of oil, gas, or 
coal. The expense involved in transporting these 
fuels and the fact that coal deteriorates in transpor- 
tation are all arguments in favor of giving careful 
consideration to this factor. The more fuel a plant 
needs as compared with other materials, the more 
important this factor becomes. 

Association with Other Industries Is Beneficial. It 
is interesting that once a city has been chosen by an 
industry, that locality becomes increasingly attrac- 


tive to similar plants. Many towns have thus be- 
come the recognized centers of certain classes of in- 
dustry. When we speak of autos, we unconsciously 
think of Detroit. Troy is associated with collars, 
shirts, and laundry equipment. Akron and auto 
tires are similarly connected. 

Once a town has gained prominence in this way it 
becomes the logical place to locate factories of the 
same character. If one should be looking for a good 
location for a furniture factory, one would find that 
Gremd Rapids is exceptionally well suited for that 
purpose. Here one may find a large and skilled labor 
supply. Young men grow up and learn the industry 
through contact with their friends and families, 
banks have experience in handling the credit paper 
that these factories have to sell, and are in a position 
to offer lower rates than a bank in some other city 
might ask, because the business was unknown there. 

Every industry needs a large number of small parts 
and tools which it must buy outside. Such secondary 
industries cannot be profitably operated where the 
demand for their products is small. 

Finally, the name of the town associated with the 
product has a certain advertising value. Other 
things equal, the Detroit-made automobile, will be 
preferred over a product of, say, Albuquerque, New 

Transportation. The rates charged by railway or 
water carrier very vitally affect the location of fac- 


tories. Great rivalry exists, therefore, between cities, 
and each endeavors to secure a railway advantage 
over its rivals. A great responsibility rests upon the 
Government and especially upon the Interstate 
Commerce Commission, for a difference of a few 
cents in freight charges may mean the difference be- 
tween prosperity and ruin for an industry, and re- 
tarded development for an entire city. 

The transportation factor is not summed up in 
high or low freight rates. The type of service which 
is available is quite as important. A cheap service,' 
subject to delays and irregularities, may be a greater 
handicap than high rates coupled with efficient serv- 
ice. The location and efficiency in the operation of 
the terminals also play an important part. Rates 
may be low and service excellent, but if the shipment 
is held up in the switchingyard because of congestion, 
or if the freight station is poorly located, so that long 
delay in haulage becomes unavoidable, these unfavor- 
able factors may destroy the advantage of low rates 
and good Jine service. Few business men realize how 
they are, to some extent, to blame for the congestion 
of our freight yards by their failure to unload the 
cars as soon as they arrive. 

The multiplicity of railway terminals and the lack 
of proper co-ordination of railway facilities, both with 
each other and with the terminals of water carriers, 
is one of the most glaring causes of transportation 
inefficiency in this country. The centralized control 


of the United States Railway Administration has im- 
proved this situation, but it is not certain that these 
improvements will remain effective should the rail- 
ways pass again into private hands. 

Whether to Locate in City or Country. Once the 
most advantageous location has been determined, it 
is necessary to decide whether the plant shall be 
built in the country or in the city. 

The country location offers many attractions ; land 
is cheaper, and it is possible to have a spur connect 
the factory with the railroad, thereby saving great 
expense in drayage. Wages are usually lower in the 
country and small town than in the city. 

But certain disadvantages must not be overlooked. 
In fact, a small plant will often find these disadvan- 
tages insurmountable. The small towns almost al- 
ways lack the labor supply. Labor is not easily 
imported, especially not if the factory is the only one 
of its kind in that locality. A "one-factory town" is 
not popular with the workers. Imported labor may 
not be content to live away from the amusements of 
the city. In order to keep the workman satisfied and 
to give them wholesome recreation, large outlays 
may be necessary. One company spends as much as 
$70,000 yearly in this way. 

Another source of expense is the higher insurance 
rates which must be paid in country districts with 
inadequate fire protection. It may also be that the 
freight rates are higher to the small town than to the 


city. It is not difificult to see why this may well be 
the case. The long-distance freight may pass through 
the town on its way to the city as part of a limited 
freight train, and return from the city by a local 
train. Expenses of handling a few cars at a small 
station are relatively higher than the expense of 
handling that same number in a larger switching 
yard. The distance from repair shops and sub- 
sidiary industries is also a disadvantage. All these 
drawbacks of the country location diminish in im- 
portance as the factory increases in size and becomes 
a more self-sufficient undertaking. 

For the moderately sized factory the city may be 
the logical place to locate. The disadvantages of the 
city are, nevertheless, quite apparent. Because of 
the expensiveness of the sites, a factory must build 
perpendicularly; this means an expensive structure. 
It means poor light and ventilation, especially since 
others on adjoining sites are also forced to build high. 
It also means expensive operation. As we shall see 
later, transportation of goods through the factory 
slows down to a marked degree when goods must be 
lifted from one floor to another. The whole factory 
is, therefore, slowed down to a less efficient rate of 
production. If we add to this the unfavorable living 
coriditions found in the larger cities, which lower the 
vitality and efficiency of the workers, then we see 
clearly that the matter of choosing the site is not 
easily disposed of. 


Inducements Offered hy Cities. When a city grows, 
the land values increase, and stores and restaurants 
and many other kinds of business enterprises make 
more money. Hence business men are vitally inter- 
ested in aiding the growth of the city in which they 
are located. One way of bringing about this growth 
is to attract factories. Factories will draw a popula- 
tion of workers and wijl increase activities in the 
banking and building fields. 

Many plans are used by ambitious business men 
to induce manufacturers to locate in their town. 
Free sites may be offered, or free use of site or 
building, with option to buy at the end of a certain 
period. In other cases free fuel, free power, exemp- 
tion from taxation, or even a cash bonus may be held 
out to persuade the manufacturer to decide in favor 
of the town. 

Sometimes methods are devised to aid in the fi- 
nancing of the enterprise. A loan corporation may 
be formed by the business men and banks which will 
lend money at a low rate to new enterprises. The 
town may organize a financial company which buys 
stock in new industrial undertakings; or a credit 
fund may be established which endorses the notes of 
new concerns and thereby makes discounting at the 
regular banks possible. These schemes only too 
often attract industries which should not be located 
in those communities, or which are launched by dis- 
honest and unscrupulous men. The wrecks of such 


artificially supported enterprises may be seen in 
many an American town. 

One of the most interesting and businesslike 
methods of attracting new industries is the factory 
incubator. Toledo and many other enterprising 
cities have a number of large factory buildings of the 
newest type of construction and completely equipped 
with the necessary power and light. New industries 
may here rent factory space, a whole floor or a part 
of a floor. The rental includes the use of the eleva- 
tor, the switching facilities, and sometimes also of 
the general employment office maintained in the 
building. Power, heat, and light are usually sold by 
meter rates. In this way a new enterprise may start 
operation without being forced to tie up a large share 
of its funds in capital investments. Once the success 
of the undertaking has been assured, an independent 
building may be built. 

Deciding upon the Site. After the decision has 
been made in regard to the town or the section of the 
country in which the factory shall be located, the 
exact site must be selected. This again opens up 
difficult problems. Many real estate firms will pre- 
sent their offerings and each will have a very good 
reason why its factory site is better than all others in 
the city. The manufacturer must proceed cautiously, 
for a factory once built cannot be moved and fre- 
quently cannot be sold to advantage. 


The principal question is not so much the price 
of the land as the facilities which the site offers. In 
case nniuch of the raw material needed can be moved 
cheaply by water, a water frontage on a canal or a 
lake accessible to ships carrying this material is 
worth a great deal. It will mean a large yearly 
saving in drayage. The distance to the nearest rail- 
road station or the possibility of having a spur in- 
stalled by means of which the freight cars can be 
brought right into the factory, all play a part. If 
the site is near a large city where a "switching dis- 
trict" has been established, it is highly important to 
know whether the site is inside or outside this 
"switching district." If outside, a higher rate will 
have to be paid to the railroad for handling the cars, 
and much delay will result when cars are to be trans- 
ferred from one line to another. The insurance rates, 
the necimess of residences which might lead to com- 
plaints in regard to the smoke or odor created by the 
factory, the street car connections with the working- 
men's residential district, and the possibilities for 
future enlargements must all be considered when se- 
lecting the site. 

Wholesale and Retail Locations. The locating of re- 
tail stores or wholesale houses must also be made the 
subject of careful study. In our larger cities the 
wholesale and retail districts are usually quite dis- 
tinct. The wholesale district is, as a rule, located 
with due regard to the location of water and railroad 


terminals. Such sites are frequently undesirable for 
retail or residential districts because of the noise and 
the large amount of trucking which prevents the 
development of other kinds of traffic, slows down the 
street car service, and keeps the pavements in 
poor shape. 

Around these wholesale districts many subsidiary 
concerns spring up. Here we find banks, freight- 
forwarders, steamship, railroad, and insurance offices ; 
all representing necessary functions in the passing of 
goods from manufacturer to wholesaler and from 
wholesaler to retailer. 

There are usually two different types of retail dis- 
tricts. One or more main shopping sections located 
near the center of the city and close to the wholesale 
district, and a large number of small retail centers 
located conveniently to the principal residential dis- 

In New York City the various districts are quite 
easily recognized. The shipping and financial dis- 
trict occupies lower Manhattan. Then traveling 
along the island, one passes through the wholesale 
district and finally into the main shopping centers on 
Fifth Avenue and Broadway. After the Central 
Park region is reached the retail district gradually 
changes into a residential section. It is interesting 
that in a growing city these districts always encroach 
upon each other. As the wholesale district grows it 


drives out the retail stores, while the residential sec- 
tions carry on a losing struggle against invasion by 
the retail stores. 

The Retail Store Location. The first step in deter- 
mining where to locate a retail store is to analyze the 
market for the products to be handled, and to decide 
whether conditions of demand and competition will 
allow a new store to enter the field. The methods 
which may be followed to ascertain this will be de- 
scribed in the chapter on selling. 

Once the city or town has been chosen, it remains 
to decide what location shall be picked within the 
town. Many stores are located in a somewhat hap- 
hazard fashion. Large chain stores, such as the 
Woolworth ten-cent stores and the cigar stores of the 
United Cigar Stores Company, are located only after 
a careful study has [been made of all available sites. 

Certain definite principles must here be borne in 

I . It is usually advantageous to locate near other stores 
of the same kind. At firsfthought this may seem 
unreasonable since the new store would then be 
opened in the midst of keen competition, but experi- 
ence shows that shoppers when in search of an 
article visit the section of the retail district where 
stores are found which handle it. Stores outside this 
section must make special outlays in advertising to 
attract that trade. Larger cities have their furni- 
ture stores, automobile salesrooms, and dry goods 


Stores each grouped in fairly well-defined sections 
of the retail district. 

2. Complementary articles are best grouped together. A 

new suit necessitates a new hat and frequently new 
shoes. Where such articles are sold in different 
stores they not uncommonly seek the same street 
and the same side of the street. 

3. The sides of the street become specialized. As stores 

which deal principally or solely in articles that 
appeal to women group themselves together, they 
will gradually force the men's stores to another 
block, or another side of the street. Any women's 
store located on the men's side will find it advan- 
tageous to change its location, since women do not 
like to pass a long line of cigar stores, men's fur- 
nishing stores, pool rooms, and saloons when on a 
shopping trip. Although this kind of specialization 
is not always so clearly noticeable, the tendency in 
that respect may be observed in most retail centers. 

4. Anything that makes wg,lking along the sidewalks un- 

comfortable will interfere with business. Slippery 
sidewalks, walks that are in bad repair, iron-covered 
cellar openings, all drive customers away, for they 
will either avoid that sidewalk altogether and 
choose the other side of the street, or they will walk 
along the outer edge, watching- their steps instead 
of looking at the window display. In the southern 
states, the side of the street which is all day long 
exposed to the hot sun is not popular, a fact which 
even a liberal use of awnings and balconies cannot 
entirely offset. Dangerous crossings will cause cus- 


tomers to avoid the sidewalk; blank walls which 
contrast with the gay and lighted windows at the 
other side of the street will have the same effect, for 
people are like moths; they go where the bright 
light shines. 
5. Though a crowded street is more likely to be a good 
retail street than a deserted one, the number of 
passers by means little in itself; they must be in 
the buying mood. The corners near the elevated 
stations in Chicago are highly desirable because 
many persons pass there every hour of the day. 
But such locations are only suitable for certain kinds 
of trade. People about to take a subway or ele- 
vated train are usually not in a buying mood. They 
are in a hurry to reach their work or in a hurry to 
get home. Only articles which are bought on sud- 
den impulse, or as a last thought before taking a car 
are logically suited for such a location. Candy 
stores, flower booths, cigar stores, and drug stores 
are especially adapted. 

A store which expects to sell goods to men must 
locate where the largest number of men of the social 
class to whom the articles appeal pass at the right 
time of the day. A street frequented by working 
people on Saturday afternoon and evening is a 
better street to locate a store of cheap jewelry and 
working clothes than a street where a large number 
of workingmen pass on their way to work. 

A careful study of the various factors which in- 
fluence the value of locations may sometimes lead to 


surprising results. Many sites are in bad repute 
only because the right kind of store has not located 
there, and may consequently be obtained at a rela- 
tively low figure, by the owner of a store for which 
that location is admirably suited. 

Summary. Before locating a business establish- 
ment a careful study should be made of the site. In 
the case of a factory, nearness to raw materials, to 
labor, power, and to the selling market must all be 
considered. For some kinds of factories a country 
location may be desirable. The small plant depend- 
ing upon other industries and not able to attract its 
labor readily does better to locate in the city. 

Wholesale and retail establishments must also con- 
sider their locations Ccirefully. The wholesaler will 
locate advantageously near other wholesale concerns 
which usually are grouped around the rail and water 
terminals where banks, express offices, and other sub- 
sidiary concerns are also congregated. 

The retail store must be located principally with 
regard to the habits of the kind of public it hopes to 
attract. All factors which might enter in to drive 
the desired trade away from the chosen location must 
be carefully analyzed. 


The same as those of the preceding chapters. Additional 

reference : 
J. R. Smith. Industrial and Commercial Geography. 

Henry Holt and Company. 



1. Give some examples of industries in your home 
state which are located near the source of raw material, 
and consider whether it would be desirable to move these 
industries closer to the market of finished goods. 

2. Study an assembling industry in your city or town 
and find out where the products which are combined 
in the finished article come from. 

An interesting way of presenting the situation is to 
take a large map of the United States and to connect the 
location of such an industry with the sources of supply by 
means of lines drawn in red ink. Then find out what the 
farthest points are to which its finished product is 
shipped and connect them with a set of lines which 
completely encircle the city. This irregularly shaped 
area is the market territory. 

3. Can you see any danger in locating a factory near 
an oil well just because this will give you cheap power 
and to ignore many other important factors? Can you 
discover any reason for the fact that the carborundum 
plants are grouped around Niagara Falls; that many 
wood-pulp mills are operated in Vermont or Massa- 
chusetts ; that Pittsburgh is a center of the iron industry? 

In order to answer these questions you must look up 
in some encyclopedia, magazine article, or government 
report the facts about these industries so that you may 
understand what raw materials are used and 'what other 
requirements the location must satisfy. 

Reference: Smith. Chapters X, XI. 



1. How would you decide whether your town is a 
good place to locate a furniture factory? Give a complete 
statement of all the information that you will need in 
order to answer that question intelligently. 

2. What information would you need in order to 
answer the question whether it is better to locate in the 
city or in the country? 

3. What is your city doing to attract new industries? 

4. How would you determine the best location in your 
town for a very expensive restaurant? 




A Poor Building Means High Cost. It costs money 
to build a factory and to keep it in repair, and it 
costs money to operate it. The object of all manage- 
ment is to obtain the largest results with these out- 
lays. That means that once the concern has in- 
vested in equipment the most complete use must be 
made of it during its lifetime. Every hour of idle 
time, every square foot of idle space, means money 
wasted. This principle holds true in factory, store- 
room, office, or retail store. 

The Factory Layout. We shall first study the fac- 
tory. Before deciding how to build a factory or how 
to arrange the various machines in respect to each 
other, it is necessary to form a very clear picture of 
what the factory is supposed to do, what processes 
will have to be housed in the building, what the rela- 
tion is of these processes to each other. It is neces- 
sary, therefore, as a first step, to analyze the work. 

Once we know the processes and the order in which 
they follow each other, we can lay out the factory on 
paper. The building becomes then little more than 
a shell, a roof to keep off the rain. This way of 
planning a factory is quite different from construct- 


ing a building first and then trying to fit machinery 
inside. This last method often leads to very poor 

The Various Types of Factories. Some factories are 
very simple indeed. Take a planing mill. The rough 
boards as they are received from the lumber mill 
enter at one end of the plant and the planed boards 
come out at the other end. This type of manufac- 
turing process has been called simple sequence. There 
are no by-products except a small amount of waste, 
neither does any combination of materials take place. 

The processes are a little more involved in the case 
of a factory which takes the raw products of nature 
and splits them up into their component parts. A 
flour mill does this. The wheat is graded and cleaned, 
after which poor wheat and trash are separated, from 
the good wheat. The wheat is then ground and the 
chaff separated from the flour. 

Much more involved is a smelter which takes the 
ore as it comes from the mine and by mechanical and 
chemical processes divides it up into some score of 
different products. A packing plant is another ex- 
ample : the cow or pig goes in at one end and from 
the other end of the factory different cuts of meat 
and a long list of by-products — glue, fertilizer, soap, 
and buttons — pass on to the consumer. 

Such manufacturing processes have been called 
analytic. They analyze the raw material, i. e., divide 
it into its component parts. A chart of the processes 



in such a factory looks very much like a pyramid. 
One simple raw product stands at the top and an 
increasing number of finished and by-products de- 
velop as the bottom is approached. 

Such a chart of processes is called a. flow sheet. Here 
is an example : 

Pmine I 



This is a very simple flow sheet, for the ore pro- 
duced by this mine consists almost wholly of zinc 
and iron ore, which are easily separated after being 
crushed and do not give riseto many by-products. 
A flow sheet of another smelter, the Balbach Smelt- 
ing Works in Newark, New Jersey, shows a much 
more involved situation. Here ore from various 
sources is smelted and refined, resulting in an output 
of arsenic, antimony, lead, lead-oxide, silver, and 


The Assembling Industries. In an assembling in- 
dustry the flow sheet looks quite different, looks, in 
fact, like an inverted triangle. At the top of the 
sheet a large number of products, usually the finished 
or partly finished products of other industries, ap- 
pear, and at the bottom of the sheet is the finishet? 
product of which they have become a part. This 
assembling may take place in one assembling room 
in the factory, the component parts being brought 
to this room. This has been called stationary assem- 
bling. In other factories another method called 
progressive assembling is found. 

The Ford process of assembling is called progres- 
sive assembling because the chassis travels upon a 
rail and is carried along at a constant rate of speed 
from one production center to the next — progresses 
from bare chassis to finished car. 

The Production Centers. The object of such an 
analysis of processes is to determine clearly the char- 
acter and order of the various processes. Each 
process through which the goods pass will necessitate 
some kind of machinery and some floor space where 
the processes are to take place. The factory may, 
therefore, be subdivided into a numbed of smaller 
factories, as it were, in each of which one process is 
housed. Such small units are called production cen- 
ters. We are now ready to determine the following 
questions : 
I. How much space must be allowed for each center? 


^ ' 'fll^H 

1 ^ 


^HH|^H^HH^oV^|<« -"•^^^^^ 



% V'^^: 

ijp ■■ ■. ■» \ ■ -■;' ""f-xj"-'-^ 


2. How must these centers be arranged to secure efficient 


3. How must the products pass from one center to 


The first question can only be answered by some- 
one experienced in the industry or famiUar with the 
kind of machinery which constitutes the production 
center. The firm which suppHes this machinery will 
frequently be able to give this information. 

It is extremely important that the productive 
capacity of each center be properly adjusted with 
reference to that of all others. Take the example of 
the flow sheet of the Franklin mine. Suppose that 
the fine crusher is so large that it can handle the ore 
twice as fast as the coarse crusher can work it. In 
that case the fine crusher will be idle half the time 
while waiting for material. If, on the other hand, 
it cannot work the ore as fast as the coarse crusher 
can feed it then there will be a piling up of material 
at the fine crusher. Production centers must, there- 
fore, be arranged so as to permit the material to flow 
through steadily without congestion or without in- 
volving idle machinery. From the point of view of 
management this uninterrupted flow of work is im- 
portant in that it sets a pace for the workmen in the 
different work centers, and makes it easy to detect 

A good way to study the best arrangement of the 
production centers is to cut small pieces of card- 


board, each representing a production center. These 
pieces may bear a picture of the machine or bench 
and should be carefully cut to scale. Many managers 
have every machine and workbench represented in 
this way upon a floor plan of the factory. By mov- 
ing these pieces about upon the floor plan, the dif- 
ferent possible combinations may be tried out until 
the most efficient one is discovered. The machines 
themselves are not touched until the layout has been 
determined upon. Sometimes cards of a different 
color are placed upon the plan to reserve space for 
machines to be purchased in the future. 

Transportation in the Factory. A very important 
question is how to connect these various production 
centers. Theoretically, of course, the goods must 
pass with a minimum delay and a minimum cost 
from one production center to anoth^. This in- 
volves some kind of transportation service. In an 
analytical industry this problem is usually not very 
difficult. Most of the material ;?ow,y. In a flour mill 
the wheat is started at the top of the mill, and flows 
through the various machines by gravity. If one 
trip through the mill is not sufficient, it may be 
started again from the top. A belt with small 
buckets lifts the material to the top of the building. 
Where horizontal transportation is needed, "screw 
conveyors" or "horizontal belt conveyors" may be 
used. It is a simple matter to regulate the speed of 
all these conveyors so that no congestion occurs any- 


whert along the line, and the whole journey may be 
completed without necessitating rehandling. 

In an assembling industry the transportation prob- 
lem is more difficult. It would not do to hoist the 
pcirts of a motor car to the top of the building and to 
let them slide down by gravity. The component 
parts are of varying sizes and weights, and usually 
require a great deal of rehandling. Here trucks, or 
in case of very heavy articles, cranes may be indis- 
pensable, though in some few machine factories belt 
conveyors are used with success. 

When trucks are used the problem of moving them 
from one floor to another presents itself. Elevators 
are always expensive, are likely to get out of order, 
and are time consuming. It has been calculated 
that an elevator will rise fifteen feet, or one story, in 
the same time that a truck travels one hundred feet 
on the level ; two stories while the truck travels one 
hundred and fifty feet; and three stories while the 
truck moves two hundred feet. 

Frequent traveling between floors is, therefore, un- 
economical. In many factories elevators have been 
completely eliminated, and inclined roads allow the 
truck to travel from floor to floor. These trucks 
should be so built that all material may be moved on 
or oflf the truck with the minimum amount of lifting. 
That saves labor and time. Sometimes this may 
mean a low truck and at other times it may mean a 
2iigh truck. This depends upon how the material is 


needed at the various machines. Too little attention 
is paid to this feature and highly paid, skilled work- 
men spend a good part of their time lifting the 
jirticles from or onto the truck. 

In order to limit the investment in trucks to the 
lowest figure they should not be allowed to stand 
idle. Some factories, anxious to secure maximum 
efficiency, place the care of trucks in the hands of a 
separate department which operates the trucks like 
a railroad system. In every production center a 
time-table is hung showing when trucks will pass by. 
At the Willys-Overland factory at Toledo, and at 
many other automobile factories, such regular truck 
service is maintained. 

Usually every production center will have its own 
set of trucks which, are loaded as the work progresses, 
to be picked up by the truck train. Such truck 
trains are pulled by a small electric or gasoline en- 
gine. This type of equipment is obviously only 
possible when trucks are used on a large scale and 
are constantly on the move. Where trucks are used 
only occasionally, hand trucks of moderate size are 
to be preferred. Trucks are always relatively ex- 
pensive. A good way to have all the advantages of 
trucks, but to avoid the expense of maintaining a 
large number of idle trucks, is to have at each pro- 
duction center loading platforms where the finished 
articles are accumulated. As soon as the platform is 
loaded a small elevator truck is shoved under the 


platform, a lever lifts the platform off the ground, 
and it can then be wheeled away to be deposited else- 
where. This is a common method of saving expense. 

Large department stores and wholesale firms suc- 
ceed in making great savings in outside delivery ex- 
pense by the use of trailers. These are trucks with- 
out engines, which are inexpensive, and when loaded 
are picked up by the tractor. The most expensive 
part of the trucks, the power unit, is thereby kept at 
work continually and so is the driver, who usually 
receives fairly high wages. 

Other Considerations. The internal arrangement of 
the plant is, therefore, determined upon the basis of 
maximum efficiency in operation. Frequently, how- 
ever, it is necessary to look further ahead and to lay 
out the plans with due regard to future enlargements. 
Proper planning of internal arrangements will make 
it possible for the architect to place the heaviest con- 
struction where it is needed, to secure saving where 
possible, and to provide for ample light wherever this 
is essential. 

After the production centers have been properly 
laid out it is necessary to find the most efficient loca- 
tion for tool rooms, stock rooms, power plants, offices, 
drafting rooms, elevator shafts, fire escapes, service 
stations, and a multitude of subsidiaries of a manu- 
facturing establishment. In locating them, consider- 
ations similar to those which determine the location 
of production centers serve as guides. 


The Building Itself. Great changes have recently 
been made in factory construction, the old frame 
building is universally considered out of date. It is 
cheap to build, but presents great danger to life and 
property from fire, and is not desirable for large 
plants nor for buildings of more than two stories. 
The slow-burning type of building is merely of heav- 
ier construction with a few changes in details which 
offer a certain degree of protection against fire. 
Many modem buildings are built of steel frame, while 
the walls built of tile or brick do not really carry the 
building. Such structures are very expensive but are 
often desirable where heavy beams are needed to 
support machinery, cranes, or shafts. A fourth type 
of construction, the re-enforced concrete building, is 
becoming more and more common. The advan- 
tages of these last two methods of construction are 
the virtual elimination of fire danger, the generous 
free space in the walls, which allows for large win- 
dows, thereby insuring light and air; and the rela- 
tively low upkeep. 

Where land is cheap, one-story buildings may tre- 
quently prove most efficient. They are cheap and 
safe, afford unusually good opportunity for lighting, 
especially by means of the saw-tooth roof, and they 
allow horizontal and straight line transportation be- 
tween production centers. 

Planning the Retail Store. The retail store faces 
problems essentially of the same character as the 


factory. Here, too, it is necessary to make the most 
complete use of the available floor space. As a 
matter of fact, the question is of even greater weight 
in the case of a store, since floor space is usually more 
expensive there than in a factory located in the out- 
skirts of the city. 

The store should, therefore, be planned to make 
each square foot of floor space as effective as possible. 
The store manager faces a difficult problem. He 
must study the desires and habits of his customers 
and must take into account the effect of his arrange- 
ment of the store upon its general appearance cmd 

Customers, as a rule, dislike to climb stairs or to 
crowd into elevators. They especially dislike going 
down below the street level. The store manager 
must, therefore, lay out his store so that goods to 
which he is anxious to attract attention are placed 
where buyers will go naturally. The less desirable 
places he must then utilize for articles which have a 
special attraction for customers or which are never 
bought in a hurry. 

The bargain basement is a logical outcome of this 
consideration. People hunting bargains do not mind 
going to the basement for them. Those who are out 
to buy an expensive rug or a dining room set — a 
purchase one makes hardly ever more often than 
once in a lifetime — ^are quite willing to go to the 
fourth and fifth story to find them. 


It is different with men's clothing. Men do not 
like to shop. They consider the time spent in shop- 
ping wasted time, and they resent it when they are 
sent from one end of the store to another or have to 
travel to some other floor to find what they seek. 
The same thing is true of women looking for such 
items as gloves, laces, ribbons, and buttons. If they 
have to go to much trouble to get to the proper 
counter, they will frequently rather go to some other 
store. With hats, suits, and dresses it is different. 
Women will spend whole days comparing models and 
prices before they make their selection, and they do 
not mind a trip in the elevator to arrive at the depart- 
ment where the goods are sold. 

Another important factor which determines the 
location of departments in a large store, is the fact 
that some goods suggest the need of other goods. It 
is always advisable to display such complementary 
goods together. Silver cigarette cases may be dis- 
played in the silver goods department, but it would 
be a mistake not to display them also near the place 
where the cigars and cigarettes are sold. These in 
turn are most advantageously located near the men's 
wearing apparel ; in that part of the store where men 
are most likely to go. 

Specialties and notions for which the demand has 
to be cultivated, such as a new model of some com- 
monly used article, often are displayed to advantage 
not in the department in which they logically belong, 


but where the largest number of customers to which 
the article appeals pass by. For the same reason it 
is wise to place articles for which a customer will 
walk across the store, at the farther end, thereby af- 
fording other goods the opportunity to catch his eye 
as he passes. 

The Retail Building. The retail store building must 
satisfy many of the requirements demanded of a fac- 
tory building and many others in addition. Good 
light, heat, ventilation, properly placed service de- 
partments, elevators, and stairs, protection against 
fire — these are necessary factors in both types of 
buildings. But the retail store must not only be a 
good place in which to work — it must be made 
attractive to the customer. A dark store repels 
customers and is a poor place to display and sell any- 
thing that needs to be inspected. By the use of a 
light finish, the interior of a building may be made 
cheerful and the amount of reflected light increased. 

The front of the building must receive careful 
attention. It must always be remembered that the 
frontage was paid fpr and that the most effective use 
must be made of the display possibilities of this 
frontage. Anything which interferes with this means 
a loss to the concern. Massive columns, unneces- 
sarily large entrances, and blank walls all mean 
frontage wasted. For the same reason everything 
should be done to induce the crowd to pass by the 


Comfortable, well-kept, aiid unobstructed side- 
walks, safe and clear crossings, generous awnings 
which protect against rain and sun, and well-lighted 
window displays are all potent factors in attracting 
trade. The modem store building, save for orna- 
mental features, is being built along lines not so 
very different from those of the modem factory 

There is disagreement in regard to whether eleva- 
tors, inclined walks, or moving staircases are the best 
adapted to the use of stores. It seems that a good, 
spacious elevator is to be preferred. The arguments 
against the other means of traveling are that an in- 
clined walk is too fatiguing for customers, and the 
moving staircase requires a certain amount of skill 
of its passengers. Women frequently dislike them for 
fear that they may not move gracefully when board- 
ing or leaving the stairs. 

Where elevators are used, prompt service is essen- 
tial. In large stores this iS obtained by the use of a 
dispatcher who at the same time acts as a store guide. 
By the use of local and express elevators, otherwise 
unpopular floors may be opened up. Especially 
when the top floor is used for a restaurant, a special 
elevator for its patrons is indispensable. Some large 
department stores divide their elevators into large 
groups, one for up and the other for down service. 
This makes a quick return trip possible and lessens 
the likelihood of congestion. 


The Receiving and Shipping Rooms. The location 
of the receiving and shipping rooms is a much more 
difficult problem to solve in the retail store than in 
the factory. In the case of the factory the position 
of the railroad siding, or of the best-paved road are the 
determining factors. The retail store usually faces 
the choice between the use of some back alley, which 
is easily blocked and used for many other purposes, 
or the sacrifice of a part of the expensive frontage 
and the obstruction of the sidewalk. It is a fact that 
even large stores, carefully planned in every other 
respect, have failed to give due attention to receiving 
and shipping. This usually results in a poorly kept 
storeroom, which again results in high costs and un- 
expected losses. 

Not a few large department stores have taken he- 
roic measures to solve this problem, and have pro- 
vided for a wide alley leading through the center of 
the building with outlets at the leasit desirable 
frontage. In Chicago and New York examples may 
be seen in the largest and best-known department 

Planning the Office. Few offices are carefully laid 
out, and as a result much unnecessary walking around 
slows down the work of the office. To lay out an 
office properly the same method may be followed as 
is used in laying out a factory. The desks are pro- 
duction centers, and should be arranged in such 
order that documents and papers may travel upon 


their customary journeys along straight lines with a 
minimum of delay and congestion. 

As far as working conditions are concerned more 
even than in a factory, good light is essential. It is 
also necessary to eliminate all unnecessary noise. 
Wooden floors and noisy office machinery should be 
avoided. Where appliances such as adding machines, 
typewriters, comptometers, and addressographs are 
needed, it is best to place them all in a special room 
and to separate this room from the executive and 
accounting offices by means of partitions. Glass par- 
titions are to be preferred to solid ones since they 
close out dust and noise but do not interfere with the 
light. It is also conducive to better work if no office, 
whether occupied by executives or stenographers, has 
too much privacy. Not many employees like to be 
caught napping. An unobstructed view of the entire 
office force, moreover, makes an impression of great 
activity upon visitors and looks cheerful and hos- 

Summary. We have studied the method of plan- 
ning a building. First, the processes are analyzed in 
production centers. Various types of factories are 
here discovered to exist: simple sequence, analytical, 
and assembling. The next problem is to correlate 
these centers, to place them in their proper location, 
and to connect them by means of the most efficient 
transportation methods. The choice between differ- 
ent conveyors and trucks must here be made. The 


building itself is a mere shell, and must be so planned 
as to cause a minimum of interference with the ideal 
layout. Light, heat, and air are the factors which 
must determine in the long run the success of a 
building — also fire protection. The retail store faces 
similar problems, but the customers must here be 
taken into account. The location of departments 
and their relation to each other, the use of floors and 
basements, the use of window space, of elevators, and 
other means of conveyance must all be made the 
subject of careful study and analysis. Nothing must 
be left to chance and guess work. The building must 
be so constructed that it will be attractive to custo- 
mers, a good place in which to work, and that it affords 
the maximum opportunity for sales display. A difhcult 
problem is the location of the receiving and shipping 
rooms, especially where a store occupies an expensive 
site, for in that case all frontages may be of great 


Same as preceding chapters. Additional reference: 

P. H. Nystrom. The Economics of Retailing. The Ronald 
Press Company. 


I. What is meant by non-productive departments in a 

Reference: Nystrom. Chapter X. 


2. Where would you locate the washrooms and clothes 
closets in a factory? 

3. Visit some factory or store and draw a floorplan. Is 
everything arranged in the most efficient way or can 
you suggest some possible changes? 

4. What considerations should be kept in mind when 
planning the arrangement of the office? 

References: Parsons. Chapter II. 
Schulze. Chapter V. 


1 . What is meant by progressive assembling? 

2. Explain why the internal arrangement of the plant 
or store is of vital importance. 

3. Where would you locate the shipping room in a 
factory built in the country, and where would you locate 
the same room in a store in the center of a large city? 




Careful Buying Is Essential to Successful Selling. 
The true importance of buying is not infrequently 
overlooked in fairly well-managed business concerns, 
and attention is devoted almost exclusively to pro- 
duction and selling. The type of business where buy- 
ing is always looked upon as important is the whole- 
sale and retail business. Here the relation between 
buying and selling is clearly evident. In a manufac- 
turing concern buying is frequently looked upon as a 
relatively simple matter of small importance. Yet 
there, too, intelligent buying requires special know- 
ledge, while accurate information regarding the pro- 
cesses of production, and the market for the finished 
goods, is absolutely essential. 

Three Classes of Purchases. There are three classes 
of articles which a factory needs to purchase. The 
permanent equipment, such as large machines, 
trucks, and cars forms one class; the raw material 
and small tools form a second group; while office 
supplies and equipment form a third. At most large 
plants where an effective purchasing department has 
been established, this office is in charge of the buying 
of these three classes of goods. In other plants the 


machinery is purchased by the engineering depart- 
ment, while the other requirements are supplied by 
the respective departments. Centralization of pur- 
chasing in one office is always to be preferred. Proper 
buying is a specialized occupation quite as intricate 
as the work of a salesman. No engineer would under- 
take to sell his product himself, no more should he 
undertake the buying of the equipment and raw ma- 
terials needed in his shop; moreover, centralization 
makes for greater standardization. Though every- 
thing may be carried to extremes, standardization is 
a measure leading to economy and efficiency. 

That standardization makes for economy was made 
unmistakably clear in the Great War. Before motor 
transport equipment was standardized, as many as. 
thirty different sets of repair parts had to be kept at 
the repair shops. Every step towards complete, 
standardization means a reduction in the money tied 
up in such parts. In an office, standardization is also 
desirable, even in such details as the shape and size 
of letter paper, the color of the typewriter ribbon^ 
and the size and color of desk pads. There are 
cases, however, where standardizatyn would not 
contribute to efficiency. In a factory where goods of 
various sizes and weights must be transported, it 
would be wasteful to have all trucks built as heavy 
and strong as the heaviest and most bulky articles, 
would require. 


The Requisition. The purchasing department does 
buying only on receipt of a "requisition order." In 
the case of expensive machinery, or new or unusual 
equipment, such orders will, as a rule, only be hon- 
ored if signed, not only by the head of the department 
where the order originates, but also by some higher 
executive officer. In the National Cash Register 
Company, four signatures are needed on every re- 
quisition for equipment, the cost of which exceeds 
$100; namely, the signature of the head of the 
department, of the supervisor, of the head of the 
division, and of the chief engineer.' 

Office supplies, raw material, and parts are also 
ordered upon requisition, but this is more a matter 
of routine. The office requisition reaches the pur- 
chasing agent from the head of the department con- 
cerned. The requisition for raw material is made out 
by the "store clerk" who is in charge of the raw 
material storeroom, and who makes requisitions as 
soon as the need arises. Similar requisitions originate 
in. the stock room where parts and partly finished 
goods are stored. 

A typical store or stock department requisition is 
given below: 




Order No. 





in Stock 

Quantity Due on 
Previous Orders 

Total Amount Used 
Past Six Months 

0. K. Checker 
0. K. Price Clerk 


Buyer's Instructions: All quotations secured to be entered on back of 
this copy and signed. 

The form given above is used for ordinary routine 
requisitions. The forms for eirticles not carried in 
stock can be made substantially the same, except 
that some additional information would be required, 
and there would be provision at the bottom for the 
signature of the proper officials who are to pass upon 
such unusual orders. 

Orders are numbered consecutively. Moreover, 
each kind of article will have its own number by 
which it is known in the stock room, accounting, fac- 


tory, and purchasing department records. Screw 
bolts, set screws, and nuts may, therefore, be known 
^s 135, 375, and 943, respectively, and each order 
"will receive its own number which will be attached 
to the item number. The first order will be 01, and 
the second 02. Accordingly, the first order of screw 
Tjolts will be known as order 13501, and the fifth order 
•of nuts will be order 94305. 

Checking the Quantity. As will be observed, there 
are three spaces at the bottom of the requisition 
-which refer to quantity, the quantity in stock, the 
quantity due on previous orders, and the total 
amount used during the past six months. This infor- 
mation in combination with the quantity asked for 
^ives the purchasing agent all that he needs to know. 
He can tell what is on hand at the time, he can tell 
"what the average need is per month, how much has 
already been ordered, and from his records he can tell 
"when that material is likely to arrive. He, therefore, 
knows whether the amount asked for is excessive or 
not enough. 

Why should he care about this? Because money 
tied up in stock is idle. The larger the quantity of 
stock or raw material kept on hand, the more money 
is tied up, and the larger the working fund must be. 
On the other hand, the quantity should never be 
allowed to run so low that the factory may at any 
time lack the necessary material, for that would lead 
to another expense — idle machinery. 


It is no simple matter to detemiine how much 
should be kept on hand of any one item. Experience 
ajid judgment must be called upon to determine this, 
but that does not mean that it can be determined by 
guess. The factors which play a part in determining^ 
the correct amount are: the average daily use, the 
ease with which a new supply can be obtained, and 
the length of time that usually elapses between the 
time when the order is placed and when delivery is 
made. These considerations will detemiine how low 
the supply may be allowed to run and also how large 
an order must be placed. It is also expensive to- 
order too frequently and too little at one time, for a 
small order takes as much work at the office and 
costs almost as much in freight and drayage as a 
large order. 

The Stock Clerk's Duties. In many concerns the 
stock clerk is a member of the office staff of the pur- 
chasing agent. The stock clerk supervises the stock 
room, and it is his duty to send in requisitions when 
stocks run low. In order to be able to insure the 
necessary supply, the stock clerk must keep his 
stock in a very systematic way, and also must keep 
careful records. 

The best way to keep stock and also raw material' 
is usually in bins. These may be arranged in lanes 
or streets and numbered with the standard numbers- 
of the articles, very much after the manner of house 
numbers. At the side of each bin may be hung a 


'Tjin ticket." On this ticket will appear the name, 
number, and description of the article, and the pur- 
pose for which it is used. The ticket also contains 
columns where the quantity ordered, received, and 
delivered to various departments, and the balance of 
stock are shown. This ticket, therefore, tells the 
nature, history, and present condition of the goods 
in the bin. In addition to this information, there is 
shown in a conspicuous place the maximum and 
minimum which should be carried in stock. An 
example of such a ticket is given on the opposite page. 

The stock clerk uses the information on this ticket 
to make out his requisition on the piu"chasing de- 

Collecting Information. The purchasing depart- 
ment, after receiving the requisition madeoutin prop- 
er form, must now decide where to place the order. 

A well-managed purchasing department will keep 
information which will make it possible to decide 
quickly where the order should be placed. Cata- 
logues of firms dealing in the products which are con- 
stantly needed are kept on file and carefully indexed, 
so that information may be obtained with littlelflelay. 
Market reports are kept up to date, so that prices of 
the staple products may be known. 

In addition to this general information, a card 
catalogue may be kept in which each article is repre- 
sented by a card. On one side of the card, the nanie, 
number, and description of the article appear, and 






























there are columns in which the past orders are re- 
corded with such remarks as will make it possible to 
tell at a glance what the experience Wcis with the 
various firms, whether delivery was made when 
promised, or whether the articles were up to stan- 
dard ; somewhat after this model : 

/ \ 






As quotations are received from firms, solicited or 
unsolicited, a record is made of them on the back of 
the card. In this way information regarding possible 
sources of supply is accumulated. 

Right here a word must be said about the traveling 
salesman. The modem up-to-date business man no 
longer looks upon him as a nuisance to be dismissed 
in any way, provided it is effectively done. The 
salesman has something to offer which can legiti- 
mately demand the attention of the business man. 


In order to sell with profit, buying must be done in- 
telligently, and no one charged with purchasing can 
afford to dismiss any offer that may be made, with- 
out giving it attention. Someone in the office should 
find timq^to listen, and to give due consideration to 
any businesslike offer. Firms like the Ford Motor 
Company, the National Cash Register Company, 
and others of like importance receive salesmen most 
courteously and send them away satisfied that they 
have been given a fair chance to present their case. 
It has been the experience of these firms that to shut 
the door to unsolicited salesmen closes the way to 
the introduction of many valuable improvements, fre- 
quently allows buying to fall into a rut, and often leads 
to an undue favoring of old sources of supply, because 
of ties of friendship, or for the sake of "rake off, " or graft. 
The purchasing agent should always be approachable, 
for in no other way can he check his subordinates. 
Sending Out Requests for Quotations. Where a 
requisition is received for unusual goods, and also in 
those cases where no recent quotations are available, 
a letter is sent to the various possible sources of 
supply. Such a letter will usually read: 

Gentlemen : 

Kindly quote us at once your best price and date of 
delivery, giving f.o.b. point and terms on the following: 

(Here the goods are described in detail.) 
Yours truly, 

Purchasing Agent 


Often the words, "This is not an order," are 
printed in red across the face of the letter to make 
sure that the request will not be misunderstood. 

When the replies come in, they are tabulated upon 
a large sheet, giving in parallel columns the name of 
the firms, the price, the terms, the f. o. b. point, and 
the date of delivery. At the bottom of the sheet is 
found a space where the reason for placing the order 
with the firm finally selected may be indicated. 
This serves as a permanent record of the placing of 
the order. 

What Determines the Placing of the Order. The 
purchcising agent in arriving at a decision is guided 
by many facts. The price is one of the most impor- 
tant considerations. The f. o. b. point affects the 
price in that the place where the goods are delivered 
f. o. b. (free on board) the railroad cars, determines 
the freight and drayage that will have to be paid. 
The terms are also important. A cash discount of 
6 per cent is not as favorable as one of lo per cent, 
while 6 per cent — ^20d (if paid within 20 days) is bet- 
ter than 6 per cent — lod (if paid within 10 days). 

Though the price is an important factor, it alone 
will not determine where the order will be placed. 
The quality also must be considered. Nor is the best 
quality at the lowest price necessarily the most at- 
tractive offer. A factory is often not so much inteSr- 
ested in the best quality as in the right quality. Its 
machinery may require a certain grade which need 


not necessarily be a high grade, while its finished 
product sold under a trade-mark must be uniform in 

When goods are needed by a certain time, the date 
of delivery may also pl^y a part in the decision. In 
short, the order will be placed where the best price 
for the right quality is combined with the correct 
time of delivery, with the understanding that due 
attention must be paid to the records of past per- 
formance of competing firms. A firm which failed 
to deliver on time in the past will not be selected in 
an emergency where time is highly important. 

Following Up the Order. The responsibility of the 
purchasing department does not end when the order 
is placed. The department must follow up the order 
to make certain that delivery will take place when 
originally promised. This is done by sending a letter 
or post card to the firm in question, reminding them 
of the promise, and asking whether delivery will be 
made on time. This letter is sent sometime before 
the order is due. 

Once the order has been sent ofif, the purchasing 
agent will receive due notice from the seller, and he 
must then see to it that the receiving clerk has the 
proper instructions so that he may receive and check 
the shipment without delay. A delay in checking 
tlie shipment, in comparing the actual amount and 
quality received with the amount and quality called 
for in the order, may result in the forfeiture of the 



right to claim damages or rebates. A rebate is a 
reduction in the price allowed to compensate for 
failure to deliver the goods according to order. 

Where the receiving clerk is not capable of judging 
the quality of the goods, a special inspector is often 
appointed and sometimes a laboratory is installed 
where the articles may be tested, and compared with 
the specifications. When the order has been properly 
filled, the purchasing agent notifies the accounting 
department, which records the purclaase, and in time 
instructs the cashier to make payment. 

In some business houses, the purchasing depart- 
ment sees to it that the cashier does not neglect 
taking advantage of the cash discount by sending 
him a communication, usually printed on red paper, 
a day before the end of the period over which the 
discount extends. 

The Purchasing Agent as a Seller. One other func- 
tion is sometimes intrusted to the purchasing agent 
and his department. He is often charged with the 
selling of "scrap," "waste," and "seconds." Scrap is 
the term used for parts of the machinery which have 
been used up and have been replaced. Waste may 
be quite valuable, and may sometimes assume the 
dignity of a by-product, while seconds are goods 
which have been produced in the factory, but which 
have been rejected by inspectors as not quite up to 
standard. They may be good and serviceable, but 
they are not good enough to bear the firm's trade- 


f _ — . — . 

mark. Where seconds are product in large quan- 
tities they are frequently mjirketed under a different 
trade-mark, and they find their way to a different 
class of consumers through the regular sales channels. 

The reason why the purchasing agent is called upon 
to sell the scrap, waste, and occasional seconds, is 
that the regular sales department does not know 
what to do with them. They do not know the people 
who buy such things. They deal with the small group 
of wholesalers or retailers who only handle the fin- 
ished article. The purchasing agent, through his 
buying of raw and partly finished products, has a 
wide acquaintance with manufacturers and whole- 
salers who are more likely to be in the market for 
such products. 

Many concerns leave it to the individual depart- 
ments to sell their own scrap, waste, and seconds. 
This is not the most efficient way. The purchasing 
agent knows the market and by concentrating such 
sales in his hands, he may build a fairly regular 
market for them, and consequently obtain better 

The Retail Buyer. The buyer in a retail store is 
quite a different person from a purchasing agent in a 
factory. After all in a factory the making of an 
article is the main thing, and proper buying is merely 
an aid, be it a valuabfe one. In the retail store it is 
different. The buyer is one of the most, if not the 
most important person. In fact, the buyers and the 


sales people constitute the store, all the other depart- 
ments are secondary. 

The buyer's work is difficult, but most fascinating. 
He must know the customers of his store, their likes 
and dislikes. He must know what they will buy and 
what they will reject. He must know what prices 
will make them suspicious of quality, and he must 
buy with these thoughts in mind. He must never 
forget that what he buys he is not buying for him- 
self, but for his customers. His tastes do not matter, 
he must always see with the eyes of the probable 

This means that in order to be a good buyer he 
must first of all be a good salesman, and must have 
the ability to "size up people." He must constantly 
be informed of the changing notions of the customers. 
This he can only do by obtaining the intelligent co- 
operation of the sales people, so that remarks 
dropped by a customer may be correctly interpreted 
and reported. 

Determining the Demand. In order to keep in- 
formed on the kind of goods customers demand, 
many stores provide their sales people with "requisi- 
tion" slips which are filled out whenever any article 
is requested which is not kept in stock. When fre- 
quent calls are made for such articles, the buyer then 
decides whether it would be wise to place these 
goods in stock. 


Advance sales from a carefully selected but limited 
stock may also be used to give the buyer some indi- 
cation of the kind of goods, or the particular model, 
which will be popular. during the season. Additional 
orders can then be placed for these models. 

Many stores maintain a corps of shoppers. These 
are usually women trained for this work, who visit 
the competing establishments in the city, and occa- 
sionally in neighboring cities, to find out what other 
stores are selling, at what prices, and whether the 
goods seem to be "moving" or find no sale. 

The keeping of a current or perpetual inventory 
book may also aid in keeping the buyer informed in 
regard to the popularity of certain goods. Such an 
inventory book corresponds to the bin tickets in the 
stock room of a factory, and from it the amount on 
hand and the average daily sales may be determined 
at a glance. 

It must not be concluded from what has been said 
that the buyer will not be called upon to exercise his 
judgment, and that he may rely entirely on such 
figures and statistics. Most goods are ordered far 
ahead of the demand, sometimes as much as six 
months, and the buyer must, therefore, depend en- 
tirely upon his judgment when determining, not only 
what, but how much he is to purchase. 

In deciding the quantity he wiH order, he must 
study not only his own customers, but the general 
economic conditions as well. If the crops in a certain 


section of the country are exceptionally large, and 
good prices prevail, the quantity of luxury goods 
purchased may safely be made larger, and there will 
also be better markets for agricultural implements 
than when the crops are poor. In the latter case, even 
necessities may not find a ready market. When, after 
a period of high prices and speculation, a change in 
the world's affairs makes the immediate future un-^ 
certain, a general policy of waiting among customers 
will make it unwise for the retailer to stock heavily 
with goods. He always runs the risk when buying 
at the old high prices of being forced to sell at a 
much lower price. 

The buyer must,- therefore, study- carefully the 
market reports and the financial papers, watching for 
every sign which may give him a clue to the possible 
future conditions of the retail market. He must also 
bear in mind the relation of goods to events. A high 
price for cotton will mean a large acreage planted in 
cotton, and this will create an active demand for 
farm implements. National holidays will mean a 
demand for flags and emblems, and a national "swat 
that fly" campaign will result in an increased demand 
for fly swats, fly traps, and fly paper. In all such 
purchases, extreme care must be exercised, for to be 
caught with a large stock of "specialties" when the 
demand is gone will mean heavy loss. The stores 
which had large stocks of service flags and buttons, 
officers' uniforms, and other military equipment on 


hand when the armistice was signed, have been com- 
pelled to sell much of this stock at, or even below 
cost, in order to clear their shelves for the goods de- 
manded by civilians. 

How Buying Is Done. Retail stores are constantly 
visited by traveling salesmen representing whole- 
sale firms or manufacturers. Much of the buying of 
retail stores takes place through these representatives 
and also from catalogues. But this method of buying 
is largely limited to more or less standardized goods 
such as hardware, tobacco, and groceries. Goods 
which are subject to fashions cannot successfully be 
bought in this manner. No buyer can afford to 
place an order with one firm until he has had an 
opportunity to see what other firms have to offer, 
and what the prevailing styles and models are that 

The buying of such articles is, therefore, usually 
not done at home. The buyer travels to the place 
where the articles are produced, or where the whole- 
sale dealers are concentrated. He visits many es- 
tablishments inspecting practically the entire stock 
before he places his orders. Some buyers travel 
abroad visiting the manufacturing wholesalers of 
Paris, Lyons, Brussels, London, and other important 
commercial centers. In some cases, buyers travel for 
this purpose both to Europe and Asia. They go to 
Ireland to buy linen and take this material to Japan 
to supervise the embroidery, after which they import 


the finished articles into the United States. Such 
buying requires a thorough knowledge of the domes- 
tic and foreign markets, and requires a considerable 
outlay. In the case of women's apparel, however, 
there seems to be no other method but this direct 
buying by the firm's representatives. 

Much of the original designing of ladies' wearing 
apparel is still done by the artists of Paris. The 
American wholesale houses send their agents abroad 
to make selections after a careful study of the models 
in the shops and of the styles on the Boulevards. 

The American representative will then purchase 
one or a number of the most successful creations. 
The manufacturer copies it and modifies it somewhat 
and need have no fear that others will produce the 
same design. 

The buyer of the retail store visits the wholesalers 
of New York or Chicago and has, therefore, a large 
market to choose from, a market which represents 
the best effort of the designers of two continents. In 
order to aid the buyers of women's apparel, the 
wholesale firms maintain showrooms where the 
buyers are seated in individual booths while living 
models walk past displaying the various garments 
which the firm has for sale. As each girl passes by 
the booth she announces the stock number and the 
price of the article and the buyer jots down notes 
upon a memorandum pad from which he later makes 
up the final order. 


In some cities a tendency is noticeable to concen- 
trate all such display rooms in one or a small number 
of buildings, so that a buyer may lose no time in 
traveling from place to place. In New York the 
Bush Building on Forty-second Street near Broad- 
way is an example. This is a large building of great 
beauty of which the lower floors are fitted out as 
clubrooms, restaurant, barber shop, men's and 
women's parlors for the comfort of men and women 
buyers, while the upper floors are entirely devoted to 
showrooms. Many of the best-known manufac- 
turers of shoes, hats, and of men's and women's 
clothes have showrooms and offices in this building. 

Supervising the Selling. The buyer of the retail 
store is held responsible if the goods which he has 
purchased do not sell. He is, therefore, directly 
interested in the selling methods of the store, in the 
way in which goods are advertised or displayed, and 
in the character, training, and efficiency of the sales 
people. This phase of the retail buyer's work will be 
discussed in detail in the chapter dealing with retail 

The Purchasing Agent in the Retail Store. Besides 
the buyers, of which, in some cases, there are as 
many as there are departments in the store, there is, 
in all large stores, a purchasing agent whose duty it 
is to buy current supplies, such as wrapping paper, 
twine, writing paper, and other office supplies, and 
who may also be charged with buying the store fix- 


tures and office equipment. His duties are essen- 
tially the same as those of the purchasing agent in a 
factory and need, therefore, no further description. 

Summary. Purchasing is quite as difficult and im- 
portant as selling. It is preferable to centralize pur- 
chasing in one office. The purchasing department 
places orders upon requisitions received from stock 
room, storeroom, shop, or office. Care is exercised 
to order just enough, and of the right quality. The 
purchasing agent must keep information showing 
the record of past purchases, possible sources of 
supply, market prices, etc. The order is placed after 
considering price, quality, terms of payment, time of 
delivery, and the record of the firm. The purchasing 
agent may also be in charge of the selling of scrap, 
seconds, and waste. 

Buying for a retail store is quite a different thing 
from buying for a factory. Retail buying requires a 
knowledge of customers, of store policy, and of the 
wholesale market. A constant study of markets is 
necessary. Buyers supervise selling. 


Same as preceding chapter. Additional references : 

C. C. Field. Retail Buying. Harper & Brothers. 

H. B. Twyford. Purchasing. D. Van Nostrand Company. 


I. Contrast the consequences resulting from efficient 
and inefficient buying. 

Reference: Twyford. Chapter I. 


2. How is the purchasing department frequently 

Reference: Twyford. Chapters V, VI. 

3. What is meant by a merchandising plan, and what 
is its relation to the buying for a retail store? 

Reference: Field. Chapter IV. 

4. What are the various steps in the buying process? 
Reference: Field. Chapter V. 

5. What qualifications must a retail store buyer pos- 

Reference: Field. Chapter XV. 

6. What qualifications must a purchasing agent pos- 

Reference: TAvyford. Chapter IV. 

7. How are invoices handled in a purchasing depart- 

References: Tw>'ford. Chapter X. 

Parsons. Office Organization. Chapters 


1. What kind of information should be collected in a 
purchasing department? 

2. How does a purchasing agent decide where to place 
an order? 

3. How is the order placed? 

4. Of what does the work of a retail buyer consist? 

5. What information can be obtained from an inven- 
tory book? 




The Term Defined. Under the term "marketing" 
we understand the processes by means of which 
goods pass from producer to consumer. The ulti- 
mate object of marketing is to place the goods in the 
hands of the consumer. The chain that connects the 
consumer with the producer may be simple or com- 
plex. Some goods pass directly from the producer to 
the consumer, while other goods usually follow a 
roundabout way and pass through the hands of a 
number of "middlemen" before they reach the ulti- 
mate consumer. 

The methods of marketing agricultural and other 
raw products are quite different from those used in 
connection with manufactured articles. The reason 
for this is not difficult to see. Raw products cannot 
be marked so that their identity may be traced. 
Wheat in a New York elevator may have been grown 
in the Dakotas or in Canada; once it has left the 
farm, the farmer himself would not be able to recog- 
nize it. Such articles are, therefore, always handled 
in bulk and are bought and sold according to quality 
and quantity. 


In the case of manufactured products this is dif- 
ferent. There is an almost unUmited range of possi- 
bilities in making any one article. In order to buy 
these goods intelligently, they must be inspected or 
they must be guaranteed by some reputable dealer 
to be uniform in grade by means of a trade-mark. 

These fundamental differences affect the method 
of marketing and make it necessary to divide our 
description of marketing into two sections. We shall 
first deal with the marketing of farm products, and 
shall then discuss the marketing of manufactured 

The Marketing of Farm Products. When the coun- 
try was but sparsely populated and the cities small, 
the farmers living in the immediate neighborhood of 
a town would almost wholly supply the consumers 
direct. In many of the smaller towns farm products 
are still marketed by "hucksters" who go from door 
to door. In the larger cities farmers often sell to the 
consumers in the municipal markets. Such markets 
are found very generally in Europe and are more and 
more being introduced in this country as a means of 
cutting down the cost of bringing farm products to 
the consumer. 

The local stores frequently sell the products which 
they have bought "in trade" from the farmers. Po- 
tatoes, eggs, poultry, apples, and vegetables are 
commonly handled by these stores. They usually 
only supply the local trade, though sometimes they 


also ship the surplus out of town to the larger cities. 

In some parts of the country the local store plays a 
very important part in the economy of the com- 
munity. In the South these stores supply the farmer 
with all he needs during the year on credit. The 
farmer pledges his crop with the storekeeper as se- 
curity for the goods received, and agrees to sell the 
crop to him. The dealer charges a high rate of inter- 
est on the loan and deducts a fat dealer's profit or 
commission from the price of the crop. The farmer, 
therefore, finds this method of obtaining credit very 

The Local Buyer. The farm products which the 
local market cannot absorb are usually sold to local 
buyers who ship the products to the distant cities or 
trading centers. These buyers perform important 
services. They provide for the farmer a ready mar- 
ket ; they look after the making of shipments, thereby 
relieving the farmer of all responsibility and risk; 
they combine the products into large shipments, 
thereby securing better transportation service; and 
finally, they sort and grade the products. The large 
quantity of products handled by them makes this 
grading possible. 

Grading of Products. The trading in raw products 
is much expedited by a system of grades. Before 
grades were introduced, wheat, cotton, wool, and 
other similar products could not be sold until they 
were inspected by the buyer. This meant that these 


products could not be sold by the farmer or the local 
buyer to the consumer or manufacturers until the 
goods had actually arrived in the trading centers. 
There was much uncertainty in regard to the price 
the goods would bring in that market. 

Through the introduction of grades the quality of 
the goods is standardized and is definitely known. 
This makes inspection of the goods themselves un- 
necessary when they are offered for sale. They are 
now sold by grade. Wheat, instead of being sold by 
sample, is now sold as Red Winter No. 3, Spring 
Wheat No. i, or by some other name and number. 
Cotton, sugar, and a long list of minor farm products 
are in this fashion sold by standard grade. These 
products may now be sold before they reach the 
market. The prices of the standard grades are pub- 
licly announced and it is, therefore, possible to direct 
the goods to those markets where the highest price 
is paid. 

The Exchanges. The character of the central 
markets has been changed in consequence of the 
introduction of standard grades. Before these grades 
were used, goods were sold at auction as they arrived. 
Now they may be sold on exchange before they have 
arrived. They often change hands several times 
while traveling from one market to another. These 
exchanges are usually incorporated associations of 
dealers in farm products. There are exchanges which 
heuidle only one commodity, such as the New Orleans 


Cotton Exchange, while others handle a variety of 
products, as, for instance, the New York Produce 
Exchange, where grain, flour, and meat products are 
bought and sold. 

The methods of dealing on these exchanges, and 
the conditions of membership are all regulated by the 
association. The exchanges play an important part 
in establishing and maintaining standard grades. 
Many of them undertake to inspect, weigh, and to 
grade the products. An arbitration committee 
settles controversies between members. A statistical 
department collects and distributes among the mem- 
bers information in regard to the conditions of the 
crops in this, and in other countries, and other data 
likely to affect the present and future prices of the 

Since the grades established by these well-known 
exchanges are internationally knoAvn, their prices 
also become world prices. 

The Wheat Trade. The wheat market is, perhaps, 
more perfectly organized than any other. The 
wheat bought by the local dealers is stored in the 
local elevators. These are large storehouses. Many 
of them are owned by the local dealers individually 
or co-operatively. Others are owned by large "line 
elevator companies," and still others are owned t)y 
the farmers' co-operative organizations. The line 
elevator companies are large concerns which main- 
tain elevators in various sections of the country. 


They buy the grain from the farmer through travel- 
ing agents and sell it on the exchange through their 
own representatives. They, therefore, have the ad- 
vantage over the local buyers who must sell through 
some broker to whom they must pay a commission. 

As the grain is placed in the elevators it is graded, 
but these grades are not official. The official grades 
are not established until the grain arrives at the 
primary market. These primary markets are great 
collecting centers for the grain of their territory. 
There are many such markets, Minneapolis, Duluth, 
Chicago, Omaha, St. Louis, and others. In these 
markets the grain is concentrated and held until it 
is withdrawn for exportation or for domestic con- 
sumption. The grain is shipped to these markets 
from the local markets. As it arrives at the primary 
market it is cleaned, graded, and mixed with other 
grain. The large exchanges are established in con- 
nection with these primary markets. 

Financing the Wheat Crop. The local buyers or 
agents pay cash for the crop. They have the grain 
stored in the local elevators and receive warehouse 
receipts upon which they may borrow money from 
the banks placing the "grain paper" with them as 
collateral. In case the grain is shipped to a buyer in 
a primary market the local buyer may use an "order" 
bill of lading as collateral and draw a draft which may 
then be discounted at the bank. The bank takes the 
draft and the bill of lading which is made out to the 


"order" of the shipper and forwards these documents 
to its correspondent. The correspondent notifies the 
consignee, who must first pay or accept the draft 
before he can obtain the bill of lading which gives him 
ownership of the grain. Accepting a draft means to 
write across the face of the draft the word "accepted," 
with the date, and properly signed. 

The buyer at the primary market may then place 
the wheat in the large elevators maintained at these 
markets and use the warehouse receipts as collateral 
for a loan. 

From the primary markets the wheat passes into 
the hands of millers, exporters, and others through 
whom it finally reaches the consumer. 

The Cotton Market. The marketing of cotton is, in 
principle, the same as that of wheat. The farmers 
usually sell their cotton in the local market to the 
merchants and to the agents of large cotton buying 
firms, or to the local gin. The gin is a mill where the 
fiber is separated from the seed. From this local 
market it is moved to the mills, the ports of export, 
or to the central markets in the interior. The bales 
of cotton which leave the gin are usually poorly baled 
and but loosely packed. They must, therefore, be 
"compressed" at the nearest compress. This reduces 
their size about one half and tightens the pack, so 
that less freight space is required and the loss in 
transit is diminished. 


The domestic mills buy their cotton largely from 
the large buying firms, and only to a limited degree 
through brokers on the cotton exchanges. The 
reason is that the mills need a certain grade of fiber 
and that the sales contract on the exchange allows 
for the substitution of one grade for another when 
making delivery. The official grades, as in the case 
of wheat, are determined by the exchanges. These 
grades are based upon the length of the fiber, the 
color, and the amount of foreign matter or trash. 
There is no absolute uniformity in these grades. 
The grades of different American exchanges differ 
among themselves, and are again different from the 
grades established by the European exchanges. 

The cotton that is exported has either been bought 
direct in the local market or has been purchased on 
some exchange. It has frequently been sold on some 
European exchamge even before it leaves the United 

The Marketing of Other Farm Products. Not all 
products of the farm are as successfully standardized 
as cotton and wheat. Nor is such standardization 
possible in every case. There is, however, a growing 
tendency in that direction. In many lines, notably 
in the case of oranges, lemons, and grapes, co-opera- 
tive organizations among the farmers sell direct to 
the wholesale trade. They grade and pack the fruit 
and ship it often under a co-operative trade-mark. 
The "Sunkist" oranges are an example of such a 


highly developed method of marketing applied to 
farm products. 

The Marketing of Manufactured Products. Manu- 
factured products require different marketing meth- 
ods from those used for agricultural products. In 
buying and selling manufactured products a real 
bargaining process takes place; the article is scru- 
tinized and compared with others similar in con- 
struction and purpose. The price for these articles is 
not a world price as in the case of cotton or wheat. 
Since the products are not uniform in quality, they 
cannot be sold, except upon inspection, or on the 
basis of samples, and the price is attached to each 
article. JS\\ White Winter Wheat No. i is sold at the 
same price; all low middling cotton sells at the same 
price at any one time and place, but who ever heard 
of a price for shoes No. 9, or a price for hats No. 7? 

Selling manufactured goods means, therefore, 
something different from selling farm products. 
Manufactured goods do not sell themselves. If one 
has hats for sale it will be necessary to convince some 
buyer that he particularly desires one of those hats 
to the exclusion of hats produced by others. There 
is much more of the personal element involved in the 
selling of manufactured goods. The buyer must be 
persuaded, if not that he is in need of an atricle, at 
least that he should buy one rather thjui another. 

The manufacturer may choose many methods of 
placing his goods in the hands of the consumer. At 


one time most manufactured goods — and this applies 
also to the various "package" goods and other gro- 
ceries sold under a brand or trade-mark — reached the 
consumer after a roundabout journey, passing suc- 
cessively through the hands of manufacturer, jobber, 
wholesaler, and retailer. 

The Various Middlemen Defined. The retailer 
makes it possible for the consumer to supply himself 
quickly with small quantities of a large variety of 
articles. The wholesaler furnishes the retailer with 
the goods he sells to his customers ; in a way he per- 
forms somewhat the same service for the retailer 
which the retailer performs for the consumer. By 
buying from the wholesaler, and not from the manu- 
facturer direct, the retailer is saved the trouble of 
establishing connections with many manufacturers. 
The orders he would be able to place with each one 
of them would be relatively small. He would, there- 
fore, not be able to command very favorable credit 
terms, nor would he be able to obtain good transpor- 
tation rates on his shipments. By buying through a 
wholesale house a retailer may obtain an assorted lot 
composed of a variety of articles, which togiether 
make a fairly large order. He is, therefore, able to 
obtain better terms. The wholesaler, located at a 
convenient center, receives the goods in carload lots 
from the manufacturers at favorable transportation 
rates. These goods when reshipped to the retailer 
have paid less freight than would have been paid by 


the same shipment if shipped direct from manu- 
facturer to retailer. 

A jobber, strictly speaking, is a dealer who buys 
jobs, i. e., special lots. These he resells at a profit 
to wholesalers and retailers, or sometimes direct to 
consumers. In fact, the jobber has neither a regular 
place to buy nor a regular place to sell the goods he 
handles. More recently, however, the jobber has be- 
come quite indistinguishable from the wholesaler, 
and the two names are now used as if they were 

The brokers or commission merchants sell the 
manufacturers' goods to wholesalers, jobbers, or re- 
tailers on a commission basis, while frequently they 
receive goods on consignment in which case the fixing 
of the price is largely in their hands. Many firms are 
called "commission men" or "brokers" when, in fact, 
they are wholesalers. 

Selling at Retail. One method of selling at retail 
is to sell through canvassers. This method is a 
modern form of the old-fashioned peddler with this 
distinction, that the canvasser rarely ever carries his 
goods with him, but usually sells by sample. In 
certain lines, and especially in country districts 
where retail stores are entirely absent or are in- 
efficient or unprogressive, selling through canvassers 
may be an effective method. Kitchen utensils, 
books, maps, and magazines are sold successfully by 
this method, notwithstanding the prejudice which 


has been created against the canvasser by the selling 
of worthless articles by unscrupulous members of 
the guild. 

The local retail store is, however, by far the most 
important channel through which goods reach the 
consumer. Success in retailing is no longer easily 
attained, and comes only as the reward of careful 
attention to all the factors which make for competi- 
tive strength. Price — at one time the principal fac- 
tor in competition, and still of great importance — 
is no longer the sole factor. More and more, con- 
sumers demand and receive superior service, fre- 
quently, though not always, paying a higher price. 
The difference in the prices of the cash and carry 
grocery stores, and those of the stores which deliver 
and sell on credit, are a case in point. The problem 
of the retailer is how to give maximum service, and 
still sell at a competitive price. 

Retail stores may be divided into three large 
classes: the general stores, the specialty stores, and 
the department stores. The general store is found 
in country districts. .Here goods of all kinds, gro- 
ceries, notions, dry goods, shoes, kitchen utensils, 
and farm implements are sold in the same building. 

A specialty store handles only one product or class 
of products. A shoe store, a hardware store, a gro- 
cery store, are all specialty stores. Such stores can 
only be conducted profitably where the amount of 
trade is sufificient to warrant specializaition. They 


present a decided advantage over the general store. 
Their specialization enables them to keep a larger and 
better selected stock; the storekeeper can study his 
market more carefully than where he has to divide 
his attention over a large number of products. This 
means more careful buying and, therefore, a more 
rapid turnover and, consequently, a fresher and 
more up-to-date stock. 

The Department Store. The department store con- 
sists of a group of stores housed in the same building. 
These separate stores or departments are, as a rule, 
not separately owned, but are owned by one firm 
though managed by different department managers. 
Many such stores in our large cities are of gigantic 
proportions. The Wanamaker stores in Philadelphia 
and New York, Filene in Boston, and Marshall Field 
in Chicago are nationally known. 

The public favors such stores because of the many 
conveniences they offer. Shoppers in need of a 
variety of articles may make all their purchases in 
one store and are, thereby, saved much time and 
strength, while the rest rooms and restaurants of such 
stores make them convenient meeting places. The 
rapid and large turnover reduces the overhead per 
unit sold. This is offset to some extent by the 
greater expense entailed in the upkeep of the expen- 
sive public conveniences which shoppers have learned 
to demand in a department store. 

Marshall, Field and Company 
EntraAce to Chicago Store 


It is interesting to note that many small specialty 
stores are frequently doing an apparently profitable 
business in the very shadow of the large department 
stores. Many causes are responsible for this. Many 
shoppers appreciate the personal interest which a 
small storekeeper or his employees take in their com- 
paratively small number of customers. This personal 
element is almost wholly lost in the large department 
store. The smaller store also offers advantages to 
the shopper who has little time to spend in making 
his purchase. There is a class of buyers who hesitate 
to enter a large and beautifully equipped store and 
prefer to deal in a modestly fitted small store. Fin- 
ally, there will always be a demand for the "exclusive" 
shop which appeals to the whims of those who do not 
care to buy the common standard goods, but demand 
exclusive patterns and high prices. 

The Chain Store. Another strong factor in retail 
competition is the establishing of chain stores. The 
specialty store usually operates under relatively un- 
favorable circumstances. Because of its compara- 
tively small turnover, its bargaining power in the 
manufacturing and wholesale market is not of the 
strongest. Its advertising possibilities are restricted 
to the one line handled and to the locality in which 
it operates. 

The department store attempts to meet these 
problems by combining a large number of stores 
under one roof, thereby increasing its buying and 


advertising strength. The chain stores are another 
attempt to accomplish the same result. In this case, 
however, the method is to establish many stores of 
the same type in various parts of the same city and 
also in other cities. Many chain stores have thus 
become nationally known. The F. W. Woolworth 
Company five-and-ten-cent stores, the United Cigar 
Stores Company tobacco stores, the Kroger grocery 
stores in Ohio, and the Stop and Shop stores in 
Seattle are examples. 

Such chain stores, because of their large turnover, 
can buy more advantageously. They usually buy 
for cash, since most of them do a strictly cash busi- 
ness with their customers. Their advertising appeal 
is not limited to one locality. When, as is usually 
the case, many chain stores are located within a 
small area, the actual stock carried in any one of 
them may be kept very small, thereby saving expense. 
A central distribution warehouse may then carry a 
relatively small surplus with which to supply the 
stores quickly as the stock runs low. The quantity 
that must be kept on hand in such warehouses is only 
a fraction of the quantity that would be lying idle if 
all stores kept their own reserve stock. 

Chain stores may be retail stores which buy from 
wholesalers or manufacturers direct. Those men- 
tioned above are of this type. They may be main- 
tained by manufacturers as an outlet to the con- 
sumer, tiiereby eliminating the middlemen. The 


Hanover Shoe Company, and the Singer Sewing 
Machine Company follow this method. A third 
possibility is presented when stores individually 
owned combine in order to buy and to manufacture 
co-operatively. The Rexall stores are of this type. 

The Mail Order Business. Another method of sell- 
ing to the ultimate consumer is selling by mail. The 
mail order business is especially of importance in 
rural communities which do not have the advantage 
of efficient and up-to-date store service. As in the 
case of the department store and the chain store, 
the usual middlemen are frequently dispensed with, 
and the mail order house buys frequently direct from 
manufacturers, even contracting for their entire out- 
put. The mail order house is justly looked upon as 
a dangerous competitor to the country retailer. 

Advantages and Disadvantages of Selling by Mail. 
Wherever the mail goes, there the printed advertising 
matter and the goods shipped by the mail order 
house can also go. Through profusely illustrated cat- 
alogues the country dweller is enabled to select his 
goods from a large stock. The catalogues of Sears, 
Roebuck and Company, and of Montgomery Ward 
and Company are found in the remotest comers of 
the country and have contributed no little to raising 
the standard of living in rural districts. 

The business is almost always on a cash basis. 
This makes for economy, since bad debts, collection 
expenses, and interest on the investment made in 


goods in the hands of customers, are all eliminated. 
The overhead expenses are low, since the only equip- 
ment required is an office building. This item is off- 
set by the very high expense of the printing and dis- 
tributing of catalogues. Another saving is foimd in 
the better terms such houses can make with manu- 
facturers and jobbers as a result of their large and' 
rapid -turnover. Mail order houses are, therefore, 
frequently able to sell at lower prices than the 
"legitimate" retail stores. 

The disadvantages of selling by mail must not be 
underestimated. Customers demand not only a low 
price, but also service. The mail order house falls 
short here and can never hope to supply it. - The fact 
that illustrations, however successful, can never quite 
take the place of actual inspection of the goods is also 
an argument in favor of the local stores. Customers 
are also more inclined to spend freely when they buy 
on credit than when they are obliged to pay cash — 
this is especially true in country communities. 

The local store, if managed properly, need have 
little fear of being driVen out of business by the mail 
order house. The superior service, the personal at- 
tention, and the credit facilities which it can offer its 
customers, combined with the fact that goods can be 
inspected and are av£iilable without delay, makes its 
position secure.^ 

The Manufacturer and the Market. The manufac- 
turer has, therefore, many channels through which 


he may reach the consumer. No matter which he 
chooses, however, he faces two problems: He must, 
first of all, persuade the middleman to handle his 
products, and then the customer must be persuaded 
to buy them in his turn. 

' The middleman, especially if this middleman is a 
large wholesaler, chain store, department store, or 
mail order house, can withold his patronage if he so 
chooses. Manufacturers will, therefore, often under- 
bid each other in an attempt to establish permanent 
relations with some large trading concern. Such a 
connection which will absorb all, or almost all, the 
manufacturer can produce, relieves the manufac- 
turer of all marketing worries and cuts his selling 
expense to a negligible figure. 

He now finds himself at the mercy of the middle- 
man. He may .protect himself by marking his goods 
in a conspicuous way with his name, and by attaching 
to them a "trade-mark." Once he has begun to use 
this distinguishing mark no one else can legally make 
use of it. In this way the manufacturer may gradu- 
ally build up a good will for his products with the 
consumer, and the middleman may be compelled to 
handle the products in order to satisfy the demand 
of his customers. 

But the danger of substitution is a serious one. 
The middlemen may attempt to displace the articles 
with those of another manufacturer who quotes more 
favorable prices. They may even go so far as to buy 


unbranded goods and to mark them with their own 

The manufacturer may protect himself to a large 
degree against this tendency by entering upon an 
advertising campaign. In other words, he can make 
his appeal directly to the consumer. Through na- 
tional advertising the name of the manufacturer or 
his trade-mark becomes at last associated insepar- 
ably with the name of the product. When we speak 
of shaving soap the names of Colgate, Mennen, and 
Williams at once come to our minds. The word 
"rolled oats" at once suggests Quaker. Almost all 
articles of daily use have thus become associated 
with trade-marks and manufacturers' names through 
national advertising campaigns. 

The possibility of substitution is not absolutely 
eliminated, but is much lessened by such advertising. 
A customer who asks for Colgate's soap usually has 
made up his mind that he wants that soap and no 
other. In most cases he will go to some other store 
rather than accept a substitute. He has learned to 
have confidence in the honesty of the maker. The 
nationally advertised trade-mark stands for abso- 
lutely imiform quality and for uniform price. It 
facilitates his shopping for he need not exercise his 
judgment as regards quality and price. He will, 
therefore, usually look with suspicion upon any at- 
tempt to sell him what he did not ask for. Especially 


SO if the article offered as. a substitute bears the 
trade-mark of the retailer. 

The retailer who is thus forced to sell trade-marked 
goods loses much of his former importance. He 
becomes more and more merely a distributing agent 
of the manufacturer. He is more and more giving 
up control of quality and price, for these tend to 
become questions of selling between manufacturer 
and consumer. 

The retailer continues to play an important role, 
however. The judgment exercised in the selection of 
goods, the attractiveness of the store, and the ef- 
ficiency of its service continue to make the difference 
between success and failure in retail selling. The 
retail store must supplement the national advertising 
of the manufacturer by local advertising, so that 
buyers will know that his store carries certain brands 
of goods. A knowledge of advertising is a necessary 
part of the equipment of a retailer as well as of a 
manufacturer. The next chapter will be devoted to 
a study of advertising methods. 

Summary. The marketing of agricultural products 
is different from that of manufactured goods. In the 
case of agricultural products the producer is usually 
lost sight of. Middlemen handle his products until 
the consumer is reached. Grading of these products 
facilitates handling them and makes it possible to 
establish world prices for them. The usual steps in 
the marketing of these products are : (i) local market 


where goods leave the hands of the producer, (2) 
primary market where goods are graded and sold on 
exchanges, (3) export or sale for domestic use. 

Manufactured products usually pass from manu- 
facturer to jobber, or wholesaler, and from him by 
way of the retailer to the consumer. Retail selling 
may take the form of general, specialty, department, 
and chain store, or may take place by mail. 

The manufacturers are endeavoring to make them- 
selves less dependent upon the middlemen by creating 
a consumer's good will through national advertising. 
The need for middlemen, however, continues to exist. 


C. C. Field. Retail Buying. Harper & Brothers. 

G. G. Huebner. Agricultural Commerce. D. Appleton 

and Company. 
L. D. H. Weld. The Marketing of Farm Products. The 

Macmillan Company. 
Ralph Starr Butler. Marketing Methods. Alexander 

Hamilton Institute. 


I. Give a detailed statement of the jobber's service 
to society and draw the conclusion whether the jobber 
should or should not be dispensed with altogether. 

References: Butler. Chapters XI, XII. 
Field. Chapter II. 
Weld. Chapter I. 



2. Has the retailer nothing to gain from handling na- 
tionally advertised goods? 

Reference: Butler. Chapter X. 

3. What are the principal factors in retail competition? 
References: Butler. Chapter V. 

Field. Chapter VIII. 
Weld. Chapter XX. 

4. Describe the marketing of wheat. 
Reference: Huebner. Chapters II, III, IV. 

5. Describe the marketing of cotton. 
Reference: Huebner. Chapters V, VI. 


1 . What are the usual channels through which manu- 
factured goods reach the consumer? 

2. Will the competition of the mail order house drive 
the country stores out of business? 

3. What arguments can you give which are in favor 
of a manufacturer carrying on a national advertising 

4. What are the competitive advantages resulting 
from the chain store organization ? 




Selling an Important Function. The relative im- 
portance of selling as compared with production 
has much increased in recent yeairs. In earlier 
days goods were to a large extent produced to order. 
In other words, the need existed and was expressed 
before the goods were produced. Selling, therefore, 
was of little importance. The traveling merchants 
who carried the goods of other cities or of other 
countries were real salesmen, but their trade was of 
small importance when contrasted with the trade of 
the domestic producers. 

In recent days, however, as a result of the intro- 
duction of machinery and the economies resulting 
from large scale production, production goes on 
quite independently. The problems have been 
reversed. Formerly the problem was to produce 
what had been ordered. Now the problem is to sell 
what has been produced. The ability to sell limits 
the size of the factory. 

Manufacturer and Middleman May Co-operate in 
Selling. As was indicated in the preceding chapter, 
the manufacturer in order to dispose of his goods 
may undertake the sales campaign himself, or he may 
follow the usual channels of jobber, wholesaler, and 


retailer. In the latter case he does not necessarily 
leave all selling efforts to the middlemen. The 
manufacturer is vitally interested in securing enthu- 
siastic co-operation from the retailer. The manu- 
facturer wants to see the retailer make as many 
sales as possible and will frequently aid the retailer 
in disposing of his goods. This aid may take various 
forms. It may consist merely in supplying the 
retailor with attractive folders which explain the 
nature and use of the articles to the consumer, or 
the manufacturer may send the retailer a generous 
supply of samples, leaving it to his discretion to dis- 
pose of them to the best advantage. Again, the 
co-operation may be more direct, and expert window 
dressers or salesmen may be sent out. 

These representatives of the producer travel from 
town to town, stopping a few days or a week in each, 
and carry on intensive sales campaigns. Strikingly 
arranged window displays are supported by adver- 
tisements in the local papers. The customers who 
enter the store are induced to witness the demon- 
strations by the factory salesmen. Apart from the 
immediate results, this method has the additional 
advantage that the retailers, after witnessing the 
methods of these trained representatives, are them- 
selves in a better position to push the products more 

Advertising as an Aid in Selling. The manufac- 
turers may also support the retailer in his selling by 


an advertising campaign. This campaign may take 
different forms. It may be a national advertising 
campaign of short or of long duration, with little 
direct relation to specific localities, or the manu- 
facturer may in his national campaign establish a 
definite link with the local efforts. The manufac- 
turers may arrange with the retailer for special dis- 
plays and special prices during some one day or week 
and then advertise the fact nationally. The "Gerard 
Week," "Palm Olive Week," and "Edison Week" 
are examples of this method of co-ordinating the 
national with the local sales campaigns. 

In order to aid the retailers in their local adver- 
tising campaigns, the manufacturer may prepare 
for them advertisements to be inserted in the local 
papers, leaving a space in which the name of the local 
dealer may be inserted. The Hart Schaffner and 
Marx clothing firm follows this method. Many 
automobile firms also make use of this method to 
standardize and to' raise the quality of local adver- 
tising. Sometimes local dealers all handling the 
same products will co-operate in their advertising. 
The Ford agencies in some of our larger cities do this 
frequently. The car is advertised and at the bottom 
of the advertisement a list of the dealers appears. 

Advertising and Selling Compared. We have here 
referred to advertising and selling and have pointed 
out how one may be called on to supplement the 
other. This may need a further word of explanation. 


The salesman in the store meets the consumer face 
to face, His problem is to adjust his arguments, his 
selling talk, to the mentality and prejudices of the 
particular person with whom he is dealing. Adver- 
tising is really a selling talk, not with an appeal to 
one particular person, but to a class of persons. The 
underlying principles which determine the success of 
a selling talk in the case of the salesman, also deter- 
mine the success of an advertisement. 

The advertiser has a somewhat more difficult situa- 
tion to cope with. The salesman has a flesh and blood 
person before him. He can watch the effect which his 
words have upon his listener. He may answer ques- 
tions or dispel objections. 

The writer of advertisements, however, addresses 
himself to an imaginary audience. Many advertise- 
ments fall flat because they fail to conceive some 
definite audience, and fail to direct the appeal to this 
group. They have the same effectiveness as a sales- 
man would have who turned his back upon his 
customer and addressed his remarks to the goods 
behind the counter. Other advertisements are 
failures because they are weak in "selling points." 
They are , like a salesman whose entire repertoire 
consists of a few stock phrases like : "These are the 
best you can buy anywhere ;" or, "They wear'm a lot 
this season." 

Such phrases do not carry conviction. They do not 
awaken a desire to buy. This leads us to the real 


test of a salesman's talk and of an advertisement. 
They have this in common, that they should arouse 
in the listener or in the reader the desire to buy, and / 
should make him act upon this impulse. This last 
phase is quite important for, unless the customer 
actually buys, all efforts are wasted. Both a sales 
talk and an advertisement should, therefore, lead its 
audience through the following stages: attention, 
interest, and action. 

Attention. First of all, the attention of the possible 
buyer should be attracted. The salesman will fre- 
quently discover that the customer has already fixed 
his mind upon a certain article. In such cases we 
may say that attention is already present and need 
not be awakened. Where he finds the customer unde- 
cided or "just looking around," he has an oppor- 
tunity to show real salesmanship. Once the attention, 
has been aroused, the first step on the road to a 
successful sale is made. 

This may sound easy, but is in fact a most delicate 
matter. It requires tact and a delicate intuition to 
approach a stranger in such a way that he will give 
his attention. It is possible to arouse a feeling of 
resentment in a customer by an awkward approach. 

In advertisements it is equally important to 
attract the attention in the right way and to hold it. 
But attracting the attention is only the first step and 
relatively simple. It is easy to attract attention 
in a printed statement as it is easy to attract atten- 


tion when addressing a person. It is a more delicate 
matter to attract a sympathetic attention and to 
arouse the willingness to listen to further argu- 

Interest. It is necessary to arouse an interest in 
what you have to say. Many advertisements fall 
short in this respect. They attract the attention by 
some freakish means, but fail to arouse interest. 
Usually they are at fault in that they attract atten- 
tion by means that have no connection with the 
article to be advertised. 

As an exaimple we may take the picture of a man 
pointing his finger at the reader while large letters 
address themselves to him with the words, "You 
must consider." This method of arresting the 
attention of the reader was quite common at one 
time. It is offensive and is poor psychology. Even 
in the case where the reader does not resent being 
spoken to in the tone of a command, there is no 
connection between the attention attracting device 
and the article advertised. The same words, the 
same pointing finger, may direct you to consider the 
good virtues of shoe polish, of toothpicks, or of a 
talking machine. That is the reason why such an 
appeal is not effective. The reader must bridge the 
gap between the device which attracted his attention 
and the article advertised, or the message which the 
advertiser hopes to "put across." A large percentage 
of readers will never bridge this gap. 


The same principle holds true in the selling talk of 
the salesman. A salesman may work his way into an 
office under some pretext or other, but unless he is 
successful in holding the attention of his prospect 
when the article in question is shown, his visit will 
be a failure. A carefully planned approach will 
attract the attention by arousing an interest. In 
other words, the two stages will blend. In the case 
of the salesman it will usually mean that he will take 
the very first opportunity to show the goods he is 
endeavoring to sell with some remark which will at 
once link the customer to the goods by ties of self- 

No one will ever buy anything until he feels that 
his pleasure, comfort, safety, or appearance will be 
benefited. The very first words of the sales talk 
must, therefore, be calculated to awaken in the mind 
of the customer some picture of himself as possessor 
of the goods. The appeal must, if possible, be to the 

In an advertisement this will mean that the best 
method of approach is by some attractive picture 
showing the article in use. An auto out in the woods 
surrounded by beautiful scenery and a happy 
family enjoying a ride; a nicely dressed woman 
handling a vacuum sweeper with one hand, evidently 
enjoying the work — these are pictures that arouse a 
sympathetic interest. 


By way of contrast, it may be effective to show, 
though less prominently, some unpleasant alterna- 
tive. A tired family on a hot summer day pushing 
its way into a crowded street car calls up memories 
of disagreeable experiences which the auto will 
forever eliminate. 

A picture of a tired woman breathing in the heavy 
clouds of dust stirred up by her broom will make a 
vacuum sweeper seem more desirable. 

By this same type of subtle suggestion the window 
display of a store may appeal to the imagination of 
those who pass by. A clerk, by gracefully displaying 
an article may also make it easy, for the customer to 
imagine herself in possession of it. In other words, if 
possible, the interest in an article must be aroused in 
such a way that the interest will lead naturally to the 
desire to possess it. 

Both in the sales talk and in the advertisement, the 
greatest care should be exercised to avoid every- 
thing which may distract, antagonize, or lead the 
prospect to make up his mind that he does not care 
to acquire the article. 

The clerk or salesman should be neatly and in- 
conspicuously dressed. A loud necktie, bright 
yellow shoes, or a soiled collar will call attention to 
themselves, and the customer will unconsciously 
focus his attention upon them. Much of the force of 
an otherwise splendid approach and selling talk will 
consequently be lost. Careful attention to minute 


details is, therefore, necessary to prevent distrac- 

Similar care must be exercised to avoid setting up 
antagonistic trains of thought. No statement 
should be made which implies that some valid criti- 
cism might be made of the article. A difference in 
wording may often make an appreciable difference in 
the reaction which it awakens, though the thought 
conveyed be the same. 

"This is much cheaper" may lead the customer to 
think that the quality will also be "cheap." It is 
better to say, "This is less expensive." It is better 
still to avoid mentioning the price until the desire 
has been fully aroused and the customer is ready to 
buy. It is dangerous to mention price early in the 
sales talk, for the mere mention of the price may 
mean a sudden dissipation of all interest. 

Once the customer has accustomed himself to 
looking upon the article as already his; once he has 
imagined himself as the proud owner, the men- 
tioning of the price may for a moment dull his 
interest, but he is much more likely to be carried 
along by his own desire and enthusiasm. The buyer 
should be led to make up his mind favorably. He will 
then frequently argue himself into buying the article 
even at a price which he would not have considered 
at first. 

Meeting Arguments. The best way to meet argu- 
ments is to avoid them. Few people remainnpleasant 


under argument. They feel a sense of pride in their 
original objection and will often resent being shown 
that they are wrong. The rule is, therefore, avoid 
arguments. This may be done in two ways. First 
of all, by anticipating the objections. This necessi- 
tates, as will be brought out later, a careful study of 
the article and also a keen sense of the buyer's 

The second method is to answer the objections 
pleasantly, giving the buyer full credit for having 
such a keen knowledge of the goods, and to demon- 
strate, if possible, the lack of foundation for the 
criticism, and at the same time avoiding contradict- 
ing the customer. 

To give an example, suppose you are selling ari 
automobile. The prospect seems interested, but he 
says, "They tell me it is no good on hills." Here is a 
chcince for a very unfruitful argument which can 
lead nowhere, and which may only cause the prospect 
to feel injured because his word is doubted. A better 
way than to argue is to invite the prospect to try out 
the machine on any hill he pleases. 

Where Advertising Differs. The writer of adver- 
tisements must keep all these matters in mind, but 
his is again a more difficult task, far more even than 
the salesman, he must anticipate objections. Now it 
is a fact that very few people will read a lengthy 
argument about anything. The advertising writer 
is, therefore, forced to be brief. In his case the best 


result will usually be obtained by picking out some 
one feature which characterizes his product and 
differentiates his from all others. Or he may select 
a number of such features. But in such a case it is 
better to bring out but one of them in any one 

He may advertise his as the comfort car, the sen- 
sible car, the car of economy, or the car of no regrets, 
and then in his advertisement explain why this 
machine possesses those qualities to an exceptional 

One advertiser may in this fashion call attention to 
the fact that his reizor blades need no stropping or 
honing — a. great saving in time; another may point 
out that his patented device allows the shaver to 
strop a blade easily, thereby lengthening the life of 
the blade and insuring superior service — a. great 
saving in money and an increase in comfort. 

It may be that each safety razor has other features 
which commend it. It may be that the compact- 
ness, the beauty of its lines, the superior finish, the 
exceptionally heavy silver or nickel plating, and a 
number of other good characteristics make one or the 
other of the razors a superior instrument. It would 
be poor psychology, however, to stress too many good 

The main reason for this lies in the fact that the 
reader of the advertisement, unlike the customer at 
the store, or the person approached by the traveling 


salesman, cannot act immediately upon his decision. 
It is, therefore, necessary to leave a clear-cut impres- 
sion. This can only be achieved when the attention 
is concentrated upon one or a few striking character- 

Sometimes when advertising an article about which 
a prejudice is known to exist in the minds of the 
buyers, this prejudice itself may form a most effec- 
tive point of attack. The safety razors mentioned 
are a case in point. No stropping, no honing have 
been advertised as special virtues of one make. This 
impression which has been created, that safety razor 
blades cannot be stropped is a splendid point of 
attack for a competing brand. All that is necessary 
is to point out that no one can expect to get a 
comfortable shave without stropping, and that this 
particular brand of safety razor makes stropping 

Another example is found in the methods followed 
to boost the sale of canned milk. This product is 
looked upon by many as an emergency product, only 
to be used in case no fresh milk i? obtainable. The 
advertising campaign, therefore, lays emphasis upon 
the fact that it is cleaner, richer, more uniform, more 
convenient, than the fresh milk supply, and urges the 
readers to use it daily for drinking, for the making of 
ice cream, and in coffee, tea, and other drinks. Never 
in any of these advertisements is the suggestion allowed 
to creep in that it is not usually thought suited for 


such purposes. All suggestions are positive, all point- 
ing to a more liberal use of canned milk. 

Advertisements, with the exception of a few 
cotnaining coupons or inviting the reader to order 
by mail' do not intend to carry the reader beyond 
the point where he desires the article. The adver- 
tisement must, therefore, leave a definite and clear- 
cut impression. Some easily remembered and 
agreeable thought must attach itself inseparably to 
the name of the article. 

The task of carrying the prospect over the last lap 
of the route to a final decision and to definite action 
must usually be left to the salesman or clerk. It is 
clear that the salesman must start his selling talk 
where the advertising campaign leaves ofif. It is a 
"car of economy" — ^that can be taken for granted; 
this conviction brought the prospect to the agent. 
Besides this outstanding characteristic, it possesses 
many others equally favorable. 

Action. In any selling situation the most critical 
point is that when the conventional "sign on the 
dotted line" point is approached. Most sales are lost 
by a clumsy handling of this last situation. The 
moment when action is suggested must be well 

Some salesmen have a happy faculty of intuition 
which enables them to tell almost without fail 
when the sale is made. Others, however, antici- 
pate this moment and lose a sale by arousing in 


the prospect the feeling that someone is trying to sell 
him somethuig he does not want, trying to "slip one 
over on him," as the slang expression goes. Others 
let the moment pass. They made a sale and never 
knew it. This mistake is quite as fatal as the other 
for the salesman will find himself at a loss what to 
say when the prospect retraces his steps and brings 
up some old objections which were apparently satis- 
factorily answered earlier in the interview. 

The salesman must, therefore, be very careful to 
choose the right moment and to lead the customer to 
action without arousing his suspicions. A carefully 
worded question which implies that the customer 
has already decided to buy the article may carry 
him over the point of hesitation. It takes a strong 
decision on his part to say, bluntly, "I don't want 
the thing at all". A question of this type made at 
the right time is likely to result in the desired action. 

Selling is, therefore, not as simple a matter as some 
are inclined to believe. Neither is selling a natural 
gift. To be sure, some persons possessed with a for- 
tunate presence, a fine sense of tact, an intuitive 
sense of fitness, make better salesmen than others, 
but even they must provide themselves with know- 
ledge, if they wish to secure maximum results. 

Knowledge of the Goods. The first requirement for 
a successful salesman is a knowledge of the goods. 
Nothing destroys so quickly the confidence of the 
prospect in the goods, the salesman, and the firm, as 


when he discovers that the salesman does not know 
the article he is selling, 

A knowledge of the goods will allow the salesman 
to point out quickly those qualities which will appeal 
especially to the particular customer, and to answer 
convincingly any possible questions. This seems al- 
most too evident to need any further explanation, 
and yet many salesmen venture out without even a 
rudimentary knowledge of the article they are trying 
to sell. 

As a rule, the traveling salesman is better equipped 
in this respect than the retail store salesman. Manu- 
factiurers nowadays are training their salesmen be- 
fore sending them out. Many of them maintain 
schools in which the salesmen are trained, first of all, 
to know their goods. The history of the company, 
the process of manufacture, the successive improve- 
ments brought in the product as a result of ekperi- 
ence, the reasons for certain features of the article, the 
uses that may be made of it are all studied in detail, 
and trips are made through the plant, so that the 
salesman may learn by observation the problems of 
its manufacture. Finally, a course in selling, i. e., 
in the making of a convincing sales talk is given, and 
the salesmen are now ready to go on the road. 

Once out in the field, they are not left to them- 
selves. Usually a prize is offered to him whose sales 
reach the highest total during a given period, or — and 
this is -fairer to all concerned — to him who reaches or 


excels the quota for his territory. In order to aid 
the salesmen in this contest and to encourage them 
in their work, many large concerns provide them with 
a sales manual, and keep in constant touch with them 
by means of printed or mimeographed talks, letters, 
or a weekly organ which, besides the records of the 
various men, gives items of interest about the fac- 
tory, and about national and international events 
affecting the production or sale of the article. 

The National Cash Register Company's Sales 
Manual consists of four chapters: (i) Salesmanship; 
(2) Approach; (3) Demonstration; (4) Closing Ar- 
guments. Much space is devoted to arguments 
which salesmen frequently face, and answers to them 
suggested by successful men in the field. This Man- 
ual is revised from time to time, and the experience 
of the salesmen is incorporated in the text. 

A retail salesman should, first of all, endeavor to 
know his stock. A clerk who does not know his stock 
works under a decided disadvantage. He cannot 
answer questions of customers, he must spend a 
long time in trying to find goods, often searching in 
vain for what is not carried, and he cannot readily 
suggest substitutes when the article asked for is 
not in stock. 

Next in importance to a knowledge of stock is a 
knowledge of the merchandise itself. A clerk who 
can talk about his goods with the convictiorv of an 


expert will at once secure the confidence of his cus- 
tomer. Knowledge always produces confidence. 

The educational departments of many of the larger 
stores give courses in textiles, leather, rubber, and 
other products, thereby enabling the clerks to ac- 
quire the specialized knowledge which they need in 
their profession. 

One important point must be brought out in this 
coimection. All selling, if it is to build good will, 
must be based upon truth. A knowledge of the 
goods will enable the salesmen to tell the truth about 
the goods they sell. Some stores make the policy of 
the store to sell without misrepresentation, an adver- 
tising point. It is, indeed, a strong advertising 
point, well calculated to build lasting good will. One 
large eastern store has a permanent reward offered 
to anyone who discovers an untruthful statement in 
the advertising matter of the store. 

Knowledge of the Buyer. A knowledge of the goods 
must go hand in hand with a knowledge of the cus- 
tomer. More and more the "natural bom" ability to 
sell is discredited, and selling is regarded as a science. 
The psychologists have recently interested them- 
selves in a study of selling and advertising, and have 
pointed out how a knowledge of the processes of the 
human mind will aid one in leading others to reach 
desired conclusions. A study of the way in which 
the average person reaches his conclusions will enable 
the writer of advertisements to avoid many of the 


pitfalls of this difficult art, and will make it possible 
for the salesman to make a more effective approach. 

Many stores have organized classes where the 
sales people are given courses in the psychology of 
selling, and are trained to watch the mental processes 
of others. Through demonstration sales these lessons 
cire brought home to them, and they are taught to 
analyze their own selling method, thereby tracing 
the probable cause for their failures. Once this criti- 
cal attitude of mind has been created, half the game 
is won. Without it a salesman will never learn from 
past experience. 

It must not be thought, therefore, that it is possible 
to give a person a selling talk or a set of rules that 
will fit all occasions. Every sale is a new problem. 
But it is possible to create in the salespeople a reali- 
zation of what is and what is not a good selling 
method, and to arouse in them that critical attitude 
of mind which will lead them to approach each cus- 
tomer as a problem to be solved, and to adapt their 
method to the circumstances. 

The Advertiser Faces Peculiar Problems. The 
writing of advertisements, though governed by the 
same fundamental principles as all other methods of 
selling, has problems of its own. The appeal of the 
advertisement is solely through the eye. Where the 
salesman should be trained to use his voice correctly, 
to eliminate any unpleasantness of speech, the writer 
of advertising copy, on the other hand, should learn 


the correct use of type, the effect of different colors, 
and the proper layout of an advertisement. In other 
words, he should not only be a salesman who knows 
his goods and his customers, and who understands 
the psychology of selling; he must also be an artist 
and a printer. An advertisement may contain a 
splendid selling point, may be worded to perfection, 
but if the type is poorly selected, or the arrangement 
of the space is defective, the advertisement will still 
be a failure. 

Another problem is faced by the advertiser, which 
does not exist for the salesman. He faces the selec- 
tion of a medium. A number of possibilities sug- 
gest themselves. Magazines, newspapers, billboards, 
street car cards, handbills, circular letters, and book- 
lets are but a few of the many ways advertising 
matter may be placed before the public. 

It is in this selection of the medium that a know- 
ledge of the product and of the possible buyer are 
important elements. These will enable the adver- 
tising manager to form a clear picture of the audi- 
ence he wishes to reach, and of the most effective 

Equally important is a knowledge of the medium 
itself. It is not enough that a medium reaches a 
large number of people. The persons reached must 
be possible buyers. A careful study of mediums will 
quickly lead to the elimination of a large number of 
iJiem. Take, as an example, a make of talking 


machines. Surely, no one would select handbills as 
a method of advertising such an article. The possi- 
bility that a bill would reach a likely buyer is very- 
small, and even if a certain number of bills foimd 
their way into the hands of possible customers, it is 
very doubtful that the bill would be read by 

In order to bring out the desirability of owning a 
talking machine, and a certain make in preference to 
all others, we must find our possible buyer in a read- 
ing mood. He must, if possible, be comfortably 
seated so that he may easily imagine, as he reads our 
message, how delightful it would be to listen to some 
beautiful melody. In other words, we must find the 
customer at home. A street car card or a billboard 
are eliminated. The newspaper, read quickly and 
then laid aside, is not the ideal medium. The maga- 
zine read in moments of leisure is the ideal. It is by 
far the most likely to be read in home surroundings, 
when a comparatively long period of leisure is set 
aside for entertainment. The right type of magcizine 
reaches, moreover, a definite, selected audience, with 
a certain standard of taste and purchasing power. 
This is the ideal situation. Now picture how, without 
leaving the comfortable chair, one may listen to all 
the great artists of the world; how, by a simple 
change of record, one may listen to the songs of child- 
hood, and you have all the elements of a successful 
setting for a fruitful advertising talk. 


The selection of the magazine should be done with 
care. It should be a magazine read by people who 
buy talking machines of the type we have to sell. 
The Saturday Evening Post, the Ladies Home Journal, 
and many others like them at once suggest them- 
selves, while the Red Book, Spicy Stories, and The 
American Boy, for obvious reasons, fall outside the 
range of possibilities. 

Local Advertising. The local retail store faces a 
different advertising problem from that of the manu- 
facturer. In this case, the object of the advertise- 
ment is frequently not so much to create a desire for 
an article as to call attention to the fact that a certain 
store carries in stock a well-known article which may 
have been nationally advertised. 

The limited extent of the selling territory also in- 
fluences the selection of the medium and the method 
of approach. The use of newspapers and of street- 
car Ccutis is, therefore, quite logical and effective. 
But in the selection of the newspapers, care should 
again be exercised to select only those which are read 
largely by the class of people who frequent the store. 
, In local advertising it is sometimes possible, and in 
such cases frequently advisable, to keep a careful 
record of the effect of the advertisements on sales, so 
that it may be known which medium brings the best 

This is very difKcult In national advertising. In 
national campaigns, which make use of the order 


coupon, or which invite the reader to write for a 
catalogue or sample, it is usual to give as the address 
not only the business address of the firm, but also 
that of a department, designated by a letter which 
differs for the various magazines in which the adver- 
tisement appears. In this way it is possible to deter- 
mine the effectiveness of advertisements in different 

The retail store is best able to test the value of a 
medium when advertising a special sale. This 
method is not infallible, since many outside circum- 
stances enter in and make it difficult to curive at con- 
clusions. It may be that the morning hours are the 
best shopping hours for that line of goods, and that 
a violent rainstorm keeps the customers at home. Or 
it may be that some public event has diverted the 
attention of the trade. 

In order to obtain the greatest efficiency, the sales- 
people of the store should be encouraged to keep in- 
formed of the goods that are being advertised and of 
the special selling points that are being featured. 
Much of the force of otherwise effective advertising 
is lost when the sales force is ignorant of the reason 
why customers come to the store. The sales people 
should be prepared to build their selling upon the 
advertisement, and to show the customers exactly 
what they ask for. Where such co-operation between 
sales force and advertising policy does not exist, the 
impression is often created that the advertisement 


was dishonest, and merely a scheme to induce people 
to enter the store in order that other goods might be 
sold to them. 

The window and counter displays should also bear 
a direct relation to the advertisements. If silks have 
been advertised, silks should be displayed. The 
whole store should be, vso to say, on tiptoe to sell 
silks. The strong suggestion which is thus created in 
the mind of the customer in favor of silks is a power- 
ful aid in selling. 

It must not be forgotten that in the case of retail 
selling, failure with a special sale may have bad 
financial results. If the goods are marked down and 
a special advertising campaign has been carried on 
to sell them, and they are not sold during the inten- 
sive sales period, their future sales value is much 
diminished. Customers remember the past special 
sales and do not favor left overs from the sale. 

Price Maintenance. A rush on account of a special 
sale may always be utilized to push the sale of other 
articles. Special sales are, therefore, used to a large 
extent in many different retail lines. Grocery stores 
use leads. This is a term used to indicate an article 
placed on sale at a low figure, sometimes even at a 
loss, in order to attract customers in the hope that 
they will buy other goods upon which a profit is 

The manufacturer of the article which is sold at a 
reduction does not look upon this with favor. A re- 


duced sale may have a bad effect on the local market. 
It may mean, -if such sales occur frequently, that it 
will become impossible to sell the goods at the normal 
retail price, and that other retailers will begin to re- 
fuse to handle them. 

This introduces the problem of price maintenance 
of nationally advertised articles. This question has 
been much discussed and is a vital issue between re- 
tailers and manufacturers. Many retailers are in 
favor of fixed prices for such articles, seeing in them 
a protection against price cutting. Other retailers, 
on the other hand, oppose any price restriction. 

The difficulty of avoiding legal entanglements 
when making price agreements with retailers has led 
manufacturers to follow a safer course, and to appeal 
to the sense of fairness and to the self-interest on the 
part of the dealers to gain support for their price 
maintenance policy. This method is proving more 
and more effective. 

The Sales Organization. In the larger manufactur- 
ing concerns which maintain their own sales organi- 
zation, selling and advertising are usually grouped in 
one department. This is usually called the sales 
department, and consists of two subdepartments, 
each in charge of a manager; the sales department 
proper and the publicity department which looks 
after all advertising matters. Where the factory is 
not large enough to maintain its own advertising 
department it may employ an advertising agency. 


In fact, many large concerns when planning an un- 
usual or extefided advertising campaign call in the 
advice and assistance of such agencies. 

In the retail store the management of the sales 
force is frequently in the hands of the store manager. 
The floor walker, or floor manager, occupies a posi- 
tion similar to that of the foreman in the factory. He 
should assist the sales people in making sales, and 
should, therefore, be selected on the basis of his 
greater knowledge of merchandise and his superior 
sales ability. He should have the confidence of the 
salespeople, and be looked upon by them not as a 
driver or policeman, but as an instructor. 

The Buyer. The buyer, discussed in the chapter 
on purchasing, is held responsible for the sale of the 
goods which he buys for his department. The sales 
force, their efficiency and control are, therefore, of 
vital concern to him, and he is usually given consider- 
able power over them. 

The buyer decides which goods shall be advertised, 
he gives the necessary information to the advertising 
department, he arranges for window displays with 
the window display department, he has his goods 
displayed in the various show cases, and he instructs 
the sales people in regard to the selling points of the 
goods and the advertising campaign. He makes 
recommendations for "mark downs," special sales, 
and other matters of store policy to the merchandise 
manager to whom he is directly responsible. 


Summary. Advertising and selling are funda- 
mentally subject to the same laws. Their differences 
arise from the fact that advertising has a more gen- 
eral bearing, and is confined to the written word, 
while salesmanship deals with the individual and the 
spoken word. In making a sale the following stages 
must be passed : attention, interest, action. Adver- 
tising and salesmanship complement each other. 
The advertisement arouses the interest, but the 
salesman must make the actual sale. A good sales- 
man must know his goods, his customers, and must 
study the psychology of selling. The advertiser, 
moreover, must imderstand the art of printing and 
must know how to select the right medium. 


J. W. Fisk. Retail Selling. Harper & Brothers. 

C C. Field. Retail Buying. Harper & Brothers. 

P. H. Nystrom. The Economics of Retailing. The Ronald 
Press Company. 

P. H. Nystrom. Retail Selling and Store Management. 
D. Appleton and Company. 

E. E. Calkins. The Business of Advertising. D. Appleton 
and Company. 

N. A. Brisco. Fundamentals of Salesmanship. D. 
Appleton and Company. 

H. L. HoUingworth. Advertising and Selling: Prin- 
ciples of Appeal and Response. D. Appleton and 


P, T. Cherrington. Advertising as a Business Force. 
Doubleday, Page & Company. 


1. How is the selling field analyzed? 
Reference: Fisk. Chapter I. 

2. How may a salesman train himself for greater 

Reference: Fislj. Chapters VI, XI, XII, XIII. 

3. Give ten reasons why a salesman should know his 

References: Fisk. Chapter VIII. 
Field. Chapter XIII. 

4. Go to some retail store in your town and watch a 
clerk sell. Describe three different sales, and point out 
where the clerk succeeded and where his method was 

Reference: Fisk. Chapter IX. 

5. Describe an advertising campaign of some local 
store, and point out whether there was efficient co-opera- 
tion between advertising, displays, and selling. 

Reference: Field. Chapter XIV. 


1. What are the three stages in a successful sale? 

2. What knowledge should one possess in order to 
become a successful salesman? 

3. What additional knowledge is necessary in order to 
become a successful writer of advertisements? 

4. On what basis should the advertising medium be 




Foreign Trade Necessary. Many articles used in 
our everyday life are the products of foreign lands. 
Coffee, tea, coco, tobacco, bananas, and spices; a 
list too long to enumerate shows our dependence 
upon the productivity of far distant lands. And not 
only products of the farm or mine, but manufactured 
products are imported to satisfy the needs of the 
American market. Matches from Japan, laces from 
France, pottery from Scandinavia, and cutlery and 
china from England represent but a few of a large 
number of manufactured products. 

On the other hand, America's goods are finding 
their way into the markets abroad. In the early 
decades of America's history these goods were prin- 
cipally products of the mines and farms, but recently 
the exports have begun to consist largely of manu- 
factured goods, shoes, automobiles, typewriters, sew- 
ing machines, and other products of our factories. 

Foreign trade, therefore, means both importing and 
exporting. In fact, as every elementary text on eco- 
nomics undertakes to explain, exports and imports 
cannot exist independently of each other. The in- 
flow of gold, which causes prices to rise in countries 


with large exports and small imports, makes exports 
more and more difficult, and places a greater and 
greater premium on imports. Exports and imports, 
therefore, will tend to become equal. Where a 
country Has invested large sums abroad upon which 
interest is due, imports may continue to exceed ex- 
ports by that amount. If, on the other hand, a 
country owes money abroad, either in the form of 
interest upon investments made by foreign financiers, 
or on account of freights or insurance premiums due 
foreign companies, the exports may steadily exceed 
imports. Foreign - trade, therefore, is influenced 
greatly by the financial relations between nations. 

The Foreign Traders. Selling Direct. Manufac- 
turers who desire to sell in foreign markets may do 
so directly or indirectly. If they decide to follow 
the direct method they may send their own repre- 
sentatives abroad, build their own foreign selling 
organizations, establish branch houses, or even fac- 
tories abroad ; in short, they may follow the methods 
they follow in the domestic market when developing 
trade intensively. Some manufacturers find that 
only by handling sales and sales promotion them- 
selves can they expect to build up an active demand 
for their goods. It may also be that their goods are 
so highly specialized that It takes experts to sell them, 
to explain their use to the buyers, and to make adjust- 
ments and repairs. Such goods are usually best 


handled direct. In no other way can a manufacturer 
be sure that his customers get the proper service. 

Before undertaking these direct relations a manu- 
facturer must count the cost. It requires a large 
capital investment and a large working fund to de- 
velop foreign markets. Not that it requires neces- 
sarily more than it would take to develop a domestic 
market, but returns are likely to come more slowly 
at first. The salesman and other employees usually 
must be better paid than those who handle domestic 
sales. Only large firms, therefore, with ample funds 
can afford to follow the direct method. The Singer 
Sewing Machine Company, the National Cash Reg- 
ister Company, the International Harvester Com- 
pany, and many other large manufacturing concerns 
sell abroad largely by that method. But even they 
find it occasionally necessary to depend upon middle- 
men. In order to cover a territory completely, they 
often find it necessary to deal through firms which 
handle a large variety of products. It will not pay 
the Singer Sewing Machine Company to establish a 
retail store to sell direct to consumers in a place 
where only one or two machines are sold each year. 
A certain minimum of sales must be assured to justify 
the expenditures resulting from branch houses. 

Selling through Middlemen. The smaller manufac- 
turer cannot very well imdertake to develop his for- 
eign market. He does not, as a rule, possess the 
necessary surplus funds to invest in an extended 


foreign campaign. It may be that he has enough 
capital available to develop the market in one sec- 
tion, but he lacks the means of entering equally profit- 
able fields elsewhere. In such cases, the services of 
three classes of middlemen are available to him. He 
may deal through an export merchant or through an 
export commission man, who maintains offices in this 
country, or he may select some reliable representative 
among the many local firms in the foreign market. 

An export merchant buys cind sells goods on his 
own account. He buys, say, from an American firm 
and sells as best he can to foreign firms. The export 
commission house does business on a different basis. 
It buys goods from manufacturers only after it has 
received an order from a foreign buyer. In placing 
the order, the commission house legally acts as agent 
for the foreign house and not on its own account. 
This is quite an important distinction. A manufac- 
turer may approach an export merchant, by sending 
a salesman to interview him, and persuade him to 
buy his goods. The merchant will then have to 
exert himself to sell them abroad. 

The export commission house, however, does not 
buy in that way. If approached, the export commis- 
sion man might answer: "All right, get my foreign 
customers to order the goods, then I shall place the 
order with you." In many cases, the foreign custo- 
mer indicates the manufacturer from whom the goods 
must be purchased. In such cases the commission 


house must follow instructions. When the foreign 
buyer orders articles without indicating the place 
where they should be bought, the commission house 
may place the order anywhere, always provided that 
the interests of its principal are properly served. In 
such cases, the manufacturer may successfully solicit 
£in order. 

The only way a manufacturer can, therefore, push 
sales through export commission houses is, as a rule, 
by advertising in the foreign market himself, and by 
filling the orders that are placed through commission 
houses. This is not satisfactory. There is always a 
great temptation on the part of the middlemen to 
substitute just-as-good articles, the manufacturers of 
which have shown them favors in the past. 

Many commission houses are beginning to make 
agreements with manufacturers to push their goods 
actively in certain markets. This aid is not given 
free of charge. A commission is charged to the manu- 
facturer on all sales and the manufacturer is ex- 
pected to share to spme extent the expenses of market 
development. In such a case, the comAission house 
becomes the agent of the seller and should not charge 
commission to the buyer also. 

The method of selling through local agents in for- 
eign markets has many advantages and also many 
dangers. The advantages are chiefly that the local 
representative can give information about conditions 
and can follow up customers and prospects, and that 


the manufacturer can leave the developing of the 
market largely to the representative, who will also 
attend to collection and assure the buyers the neces- 
sary service. 

It is Necessary to Study the Market. The American 
business man has not devoted much attention to a 
study of foreign markets. He has been too busy 
studying the local market. Foreign countries may 
have interested him as a place to spend his vacation, 
but as a selling field they did not, imtil recently, 
attract his attention. The fact that most of our 
exports were for a long time agricultural products 
has been in part responsible for the lack of attention 
that has been paid to foreign markets. Agricultural 
products sell themselves. Their price is usually a 
world price and their quality is fairly well standard- 
ized. They move naturally wherever the need ex- 
ists. They are dealt in on the exchanges and are sold 
by brokers or commission men, whose only sales 
organization is an office near the exchange. 

Selling manufactured products is a different mat- 
ter, here competition exerts itself in its most severe 
form. Price, quality, and service are all factors 
which influence the decision of the buyer. Fre- 
quently such products supply a need which must 
first be awakened, as in the case of most luxuries. To 
sell such goods demands a thorough knowledge of the 
market and a knowledge of the goods combined with 
selling ability. 


Before venturing upon a foreign selling campaign 
the characteristics of the people and their habits and 
customs should be studied so that the appeal may 
be worded in terms which they will understand and 
like. The dignified and impersonal advertisements 
common abroad would be ineffective with American 
readers. Their appeal is not definite enough and 
they fail to arouse the active interest of the pro- 
spective buyer. On the other hand, the snappy 
advertisements with a note of command in them to 
"sign here and now" have an equally unpleasant 
effect upon foreign readers. They like to be asked 
to "please write for further information." They 
resent being ordered to do so. 

These examples illustrate, of course, very elemen- 
tary truths. They indicate, however, that a pre- 
liminary study is necessary and, above all, they indi- 
cate that it makes little difference what we think or 
believe to be the best thing, if we want to sell in 
foreign fields we must follow the same principle as in 
the domestic market — satisfy our customer by selling 
him what he wants in the way he wants it, and not 
by trying to sell him what we think he should want. 

A careful study should be made of the purchasing 
power of the market. The density of population, 
the character of the cities, architecture of the houses, 
the condition of the roads, all these factors play an 
important part. 


The Tariffs Musi Be Studied. The customs tariff 
and the way in which it is administered must also 
be carefully studied, for this combined with the 
other charges, transportation, and insurance will 
determine what the cost to the consumer of the 
goods will be. It may not always prove a simple 
matter to get information about tariffs. In this, as 
in many other cases where information is desired, it 
is best to make use of the many public and private 
information services. 

Private Sources of Information. Much valuable 
information in regard to tariffs and trade-mark laws 
in foreign countries and also in regard to the methods 
of packing and the making of shipments may be 
obtained through the. foreign trade bureaus of the 
various chambers of commerce. Many of these 
chambers maintain libraries where the standard 
books on foreign trade subjects and the best export 
magazines may be found, and also maps, government 
bulletins, and directories of foreign cities. Some of 
these bureaus publish weekly or monthly foreign 
trade letters which give interesting and vital infor- 
mation about conditions and events in foreign 


Chambers of commerce are primarily designed to 
serve a city or a certain section of the country. 
There are a number of. organizations which are wider 
in their scope and which serve the interests of all 
who care to become members or of manufacturers of 


certain articles. Such organizations are, among 
others, the National Lumber Exporters Association 
and the New England Shoe and Leather Association. 
The most powerful national organizations are the 
American Manufacturers Export Association and the 
National Association of Manufacturers. 

Much printed material is published by these organ- 
izations; one of the best known, Export American 
Industry, is published by the National Association 
of Manufacturers which also publishes The American 
Trade Index, which is a list of the members with 
their addresses and condensed information regarding 
their business. 

Banks Promote Trade. Banks which are interested 
in financing foreign business, offer their clients much 
valuable aid in gaining a better knowledge of foreign 
meu-kets. Many of them maintain a foreign trade 
department which answers questions relating to the 
export and import business and publishes daily or 
weekly bulletins giving information regarding com- 
mercial events abroad. The banks secure this infor- 
mation in part from their correspondents and branch 
establishments in foreign cities. 

Commercial Museums. Another reliable source of 
information is found in the Philadelphia Commerdal 
Museum. This is an institution supported by the 
City of Philadelphia and the State of Pennsylvamia. 
It has wonderful exhibits of products from all parts 
of the world, showing the processes by which they 


are produced and the use made of them. This same 
museum maintains an information bureau which is 
prepeired to advise business men in regard to the 
many problems of foreign trade. 

From these sources a business man can receive 
answers to his many questions, and advice in the 
solving of his problems. Many of these organiza- 
tions are able to bring him in touch with firms abroad 
which handle his class of products, or which are in- 
terested in experimenting with them. They also 
offer the services of expert translators who will 
undertake for a moderate fee the translating of 
letters, catalogues, and advertising matter. 

Government Sources of Information. More impor- 
tant even than these sources of information is the 
service which the United States Government places 
at the disposal of business interests. 

Consuls in practically every important city of the 
world are in constant touch with the officials in Wtish- 
ington, and the reports which they send in, after 
being edited and condensed, appear in the Commerce 
Reports which are issued daily by the Bureau of 
Foreign and Domestic Commerce and may be re- 
ceived regularly by anyone who is willing to pay 
$2.50 a year. 

No business man interested in foreign trade can 
afford to ignore these reports. They contain the 
latest information regarding tariff regulations, steam- 
ship lines, banks, expositions, £Uid many other sub- 


jects of interest to the foreign trader. A list of Trade 
Opportunities appears on the last page of these re- 
ports. Special Consular Reports appear from time 
to time, giving information gathered upon some 
special topic. One such report, for instance, deals 
with public markets, another with port facilities.. 
The Special Agent Series is another set of pamphlets 
issued by the Bureau. These are reports prepared 
by the special agents of the Bureau of Foreign and 
Domestic Commerce and deal with such topics as 
the hardware market in Australia or the shoe indus- 
try in Great Britain. 

The Bureau maintains a number of branch offices 
in many of the larger cities pf the United States, and 
in others it co-operates with local chambers of com- 
merce by supplying regularly all publications of the 
Bureau, and by placing at the disposal of the business 
men additional trade information held for distribu- 
tion in Washington. 

Miscellaneous Government Aid. The government 
aids foreign trade in many other ways. . Merchants 
who import goods subject to import duties may post- 
pone payment of the duty and store the goods in 
bonded warehouses. In case the goods are exported, 
no duty is paid at all. If, however, the goods are 
finally allowed to enter the United StateSj duties will 
have to be paid. This means a great saving to the 
merchants, for in this way they are not compelled to 
tie up their funds in paying duties until t^ goods are 


actually released for home consumption, and by that 
time they may have been sold to others. 

The restrictions on the use of these warehouses 
limit their use to comparatively few cases. It is now 
proposed to establish free zones or free ports on both 
the Atlantic and Pacific coasts. Such free ports are 
an enlargement of the bonded warehouse. They are 
bonded areas in which manufacturing, repacking,. and 
reshipment may take place. The goods re-exported 
never pay duty. Only goods which cross the line 
into the United States customs territory pay duty. 
Such zones have existed for years abroad £ind have 
proved to be a great aid in foreign trade. 

The Federal Government has alpo taken an inter- 
est in education for foreign trade. The Federal 
Board for Vocational Education has issued a pamph- 
let called Vocational Education for Foreign Trade and 
Shipping, which gives outlines and references for 
courses in foreign trade for high schools and colleges, 
and which may also be used as guides for further 

Combination for Export Trade. Since the develop- 
ment of some markets requires much capital and 
speciaUzed knowledge, small firms find it almost im- 
possible to engage actively in foreign trade. By 
combining their resources, many small concerns may 
be enabled to employ a few able men at high salaries 
who can build an active foreign demand. The ex- 
pense of a good-sized selling organization, though 


high, when distributed over a number of firms does 
not mean a heavy burden on any one of them. Such 
combinations are now permitted imder the Webb- 
Pomerene Act, which became a law in 1918. Prior 
to this law all combinations among competing firms 
were illegal as a result of the provisions of the Sher- 
man Anti-Trust Law of 1890, the Wilson Tariff Act 
of 1894, and the Clayton Anti-Trust Law of 1914. 

In other coimtries, more especially in Germany, 
combinations were encouraged by the governments 
which were anxious to promote export trade. The 
American exporters were, therefore, somewhat at a 
disadvantage. The new law permits combinations 
for export, but has been much criticized for not per- 
mitting the same freedom of action in import trade. 
A number of other minor criticisms have been made 
of the Act and it may be expected that a revision 
will soon be made, and that the revised bill will in- 
clude importing. 

Protection of Trade-Marks. An important matter 
which American exporters often overlook is the regis- 
tration of trade-marks. All civilized countries pro- 
vide for their registration, and once the trade-mark 
has been duly registered, the law protects the rights 
of the one who has registered the mark. 

The question, who has the right to register a mark, 
is not answered in the same way in all countries. 
Some countries consider prior use as the real mark 
of ownership; others consider the act of prior regis- 


tration the final proof of ownership. The result is 
that in some countries men who have no intention of 
using certain well-known trade-marks register them 
in order to prevent the foreign manufacturers who 
originated them from using them in their markets. 
Usually such persons are willing to sell their rights 
acquired in this piratical way for a good sum to the 
real owners of the mark. In order to avoid such 
conditions, the American manufacturer should regis- 
ter his mark in foreign markets even if he has no 
immediate intention of entering them. 

Advertising in Foreign Markets. Advertising has 
not been developed to the same degree abroad as it 
has in the United States. A lavish use of advertising 
space may create an unwished-for impression. The 
foreign consumer frequently feels that an article 
which can bear such enormous advertising expense 
is probably selling far above its normal price. It is, 
therefore, best to follow custom. Though American 
methods may undoubtedly be used abroad they 
should be used judiciously. A careful study should 
be made of the selection of papers and magazines, for 
these have a much more sharply defined class appeal 
than similar publications in this country. 

Many manufacturers send their catalogues to 
American consuls abroad. This is a good thing but 
it would be unwarranted to expect big results. Con- 
suls cannot carry on an active campaign for anyone, 
and can only answer queries that come to them. 


The Sample Fair. Recently the old "fair" has been 
revived in Europe, and the American manufacturers 
will do well to acquaint themselves with its features. 
A fair, or sample fair, is a gathering of representatives 
of manufacturing concerns who bring samples for 
the inspection of visiting buyers. Such fairs bring 
together a large number of sellers and buyers and 
make it possible for exporters and importers to place 
their orders without traveling over long distances to 
visit each plant individually. Prior to the war, only 
two such fairs of international importance existed, 
the Leipzig Fair in Germany, and the Nizhni Nov- 
gorod Fair in Russia. Both of them origLnated sev- 
eral centuries ago when such periodic fziirs were the 
only way in which international trade could effec- 
tively be carried on. At the time of such fairs the 
princes or lords agreed to allow traveling merchants 
free and safe passage to and from the market places. 
This was called "market peace," for war was in those 
days the normal condition of society. Those early 
merchants carried with them their entire stock of 
goods, but they would accept orders to be filled at 
the next market which usually took place every six 

As the goods became more standardized so that 
buying by sample and description became pos- 
sible, the fairs gradually disappeared and those that 
remained, with the exception of Leipzig and Nizhni 
Novgorod had only local significance. Russia, be- 


cause of its p6or roads and long distances, still has a 
large number of such local fairs. 

Since the war began many fairs have been opened 
and they have all become permanent institutions. 
The goods sold there are all of a type which must be 
inspected closely before they are purchased, machin- 
ery, laces, pottery, and furs are all in this class. The 
most important modem fairs are those of Lyons, 
Bordeaux, Paris, London, Glasgow, Utrecht (Hol- 
land), and Goteberg (Sweden). 

How Goods Are Quoted. When entering a foreign 
market the salesman and his principal should make 
a careful study of the customs of the market. No 
one who did not know the hardware trade in this 
country would expect to make many sales until he 
had first learned how dealers usually buy their goods, 
what terms they ask, and how payment is usually 
made. The same thing is true, of course, in a foreign 
market. Customs in markets differ greatly. Wheat 
in the United States is quoted and sold in cents per 
bushel, in France in centimes per kilo, in British 
India, however, the quotation indicates how many 
sers can be obtained for one rupee. 

The first thing, therefore, is to learn the systems of 
weights and measures and the coinage systems used. 
The next step is to learn the methods of quoting. 
Various methods may be followed. Some goods are 
always sold /. o. b. port of exportation. This means 
that the goods are delivered free on board of the 


vessel and that all further expenses, such as transpor- 
tation and insurance must be paid by the buyer. It 
is more convenient for the buyer and, therefore, good 
business, to quote c. i. /. This means cost, insurance, 
alid freight included. The buyer may then know 
what the goods will cost when they arrive at the port 
of importation. Sometimes, and this occurs fre- 
quently in Europe, quotations read jree godown or 
free warehouse. This means that the price quoted 
includes all expenses, even the cartage to the ware- 
house of the buyer. 

American firms sometimes do not recognize suf- 
ficiently the importance of making it easy for the 
buyer to figure what the goods will cost him, and are 
too much inclined to quote f . o. b. New York, leaving 
the buyer very much in doubt as to what additional 
expenses are likely to accumulate. 

Methods of Payment. A not uncommon way of 
quoting is "cash New York." This means that the 
goods are not dispatched until the cash has been re- 
ceived. It takes little imagination to see the objec- 
tions to this method of demanding payment. The 
buyer is expected to pay before he has been able to 
inspect the goods and long before he receives them. 
Such temis are considered insulting by well-estab- 
lished foreign firms. 

Cash against documents (d /c) or Documents against 
payment (d/p) is another common quotation. This 
means that the documents are handed over by the 


bank to the consignee only after he has paid a draft 
for the amount of the invoice. This amount the 
Bank then transmits to the exporter or to the Ameri- 
can bank which bought the draft from him. The 
documents referred to will be discussed more in de- 
tail in the following chapter. The most important 
document is the bill of lading (B / L) , which is a re- 
ceipt issued by the steamship company for the goods 
and which is the only document by means of which 
ownership of the goods can be transferred. Or it 
may be that the bank has been instructed to deliver 
the documents upon acceptance of the draft (d /a). In 
this case, the draft is usually a time draft, upon 
which payment is due in one, two, three, or even six 
months. The length of this credit period is determined 
according to the customs of the market and of the 
trade. Agricultural countries usually require long- 
time credit, while in highly industrialized countries 
like England, France, or Germany, good service and 
low prices are bigger selling points than long credit. 
Summary. Foreign trade is necessary to a country 
and must consist of both imports and exports. Finan- 
cial relations with other countries may cause either 
imports or exports to exceed for a long period. 
Foreign trade may be carried on direct or indirect. 
Indirect foreign trade takes place through export 
merchants and export commission houses. It is 
necessary to study the market carefully so that the 
purchasing power of the market and the character 



of the goods demanded may be known. Many 
sources of information are available,, private and 
public. Chambers of Commerce, banks, and mu- 
seums supply information. The government re- 
ports, especially the Commerce Reports, are valuable. 
The Government also aids by supplying bonded 
warehouses, by allowing combinations for export 
trade, and by protecting trade-marks. It is neces- 
sary to study carefully the various methods of 
quoting the prices and quantities of goods, and the 
methods of payment. 


B. O. Hough. Practical Exporting. Johnston Export 
Publishing Company. 

J. Anton de Haas. Foreign Trade and Shipping. Alexan- 
der Hamilton Institute. 

J. R. Smith. Industrial and Commercial Geography. 
Henry Holt and Comoanv. 


1. What is meant by a favorable balance? 
Reference: Smith. Part H, Chapters I, XV. 

2. In which cases is selling "direct" advisable? 
Reference: de Haas. Part I, Chapter VH. 

3. Are all Chambers of Commerce like the American? 
Reference: de Haas. Part I, Chapter V. 

4. What is the Government doing to help the develop- 
ment of foreign trade? 

Reference: de Haas. Part I, Chapter IV. 


5. What conditions led to the passage of the Webb- 
Pomerene Law? 

Reference: de Haas. Part I, Chapter X. 

6. How may prices be quoted in foreign trade? 
Reference: de Haas. Part I, Chapter VHI. 


1. Explain why foreign trade means both importing 
and exporting. 

2. What is the difference between an export merchant 
and an export commission house? 

3. What must one know about the foreign market 
before he can safely undertake to do business there? 

4. What private sources of trade information are open 
to the foreign trader? 

5. Why was the Webb'-Pomerene Law necessary? 

6. What is a sample fair? 

7. What is the meaning of the following abbreviations : 
f.o.b.; c.i.f.; dip; d/a; B/L? 




Checking the Order. We shall first describe, step 
by step, how an order is filled, and how it reaches the 
foreign consumer. This description of making an ex- 
port shipment will be followed by a description of 
the process of importing. When a foreign order 
reaches a manufacturer, it is referred to the foreign 
department or export department. In this depart- 
ment it will, in most cases, be recorded according to 
the following method. 

The mail clerk opens the letter and removes the 
contents from the envelope. Upon discovering that 
it is an order, he will send it to the desk of the credit 
man. This official will have on file the necessary in- 
formation from which he can tell whether the firm 
sending in the order is reliable, and, if so, what terms 
have in the past been quoted in the territory from 
which the order comes, and to this firm in particular. 
He will make a note of his findings and attach it to 
the order which is now passed on to the manager of 
that foreign territory. 

The manager approves of the order and instructs 
his stenographer to write a note acknowledging the 
order with some expression of appreciation, and 


whenever possible, he indicates the probable time of 
dispatch of the order. 

Preparing the Order. Now the order goes to the 
order clerk. It is his duty to see to it that the order 
is properly filled. If the goods are to be bought out- 
side he, or a purchasing agent, must send out re- 
quests for quotations and place the order at the best 
price. If the goods are to be manufactured the pro- 
duction department must be notified. 

The goods when received from the outside source 
are inspected by the domestic shipping clerk and 
passed on to the foreign shipping clerk, who knows 
how goods for foreign customers should be packed. 
In case the goods were in stock, the stock room or the 
production department delivers them to the foreign 
shipping clerk. 

Procuring Freight Space. Meanwhile it is neces- 
sary to procure freight space. Staples shipped in 
large quantities, such £is ore, wheat, cotton, and lum- 
ber, are usually handled in full cargo lots. That is to 
say, they require an entire vessel. In such cases it 
will be cheaper to charter, i. e., hire a tramp. A 
tramp is a ship not doing regular "line service," 
which picks up freight where it may be found and 
carries it to any place desired. The rate that is 
charged for such services will, of course, be influ- 
enced by the distance, the time required for the trip, 
the size of the ship, the degree of competition be- 
tween carriers, and also by the likelihood that an 



outward cargo will be secured at the port of destina- 
tion. The contract between the shipowner and the 
shipper is called a charter party. A shipper need not 
attend to all details himself. He may, and usually 
does, secure a vessel through a ship broker who, 
through his correspondents in many ports is in- 
formed of the whereabouts of ships and of freight 
waiting to be moved. 

Manufactured products, however, do not usually 
move in such large quantities. Moreover, because 
of their great value, and because almost always a 
definite date of delivery has been set they cannot 
move on slow and irregular steamers, but must make 
use of fast reliable line service. The rates may be 
higher, but the better service offsets this disad- 

In asking for freight space, sufficiently detailed 
information must be furnished so that the steamship 
company may know the weight and volume of the 
shipment. The steamship officials need this infor- 
mation so that they may proportion the cargo offered 
to the various ships. 

The steamship company now makes a freight offer 
which must be accepted without delay. Once ac- 
cepted the freight space is reserved whether used or 
not. When the offer is accepted, the steamship com- 
pany sends a shipping permit. This is an order to the 
ship's clerk on the dock to receive the goods when 


Marine Insurance. This shipment must now be 
insured against the dangers of the voyage. This may 
be done by taking out a separate policy for the ship- 
ment, or it may be done under open policy. The 
open policy is a contract between shipper and insur- 
ance company which insures all goods to be shipped 
during a certain period. All that is necessary under 
such a policy is to notify the insurance company that 
a certain shipment has left by a designated vessel, 
whereupon the insurance company forwards a policy 
covering the shipment. The marine insurance policy 
is frequently made to cover an amount in excess of 
the cost of the goods. This is necessary to cover all 
incidentals, such as freight, brokerage, and consular 
fees and interest on the investment. 

Invoicing the Shipment. The preparation of the in- 
voice is a difficult piece of work. The document must 
contain a careful description of the goods, the unit 
price, the total price for each group of articles, and 
finally the grand total. From this must be deducted 
the discounts agreed upon. If extras,, such as pack- 
ing, consular fees, freight, and insurance are to be 
charged to the buyer, these items may be added to 
the bottom of the invoice, or they may be brought 
together on a separate sheet called a "statement of 
charges." Foreign invoices must always, be signed by 
the export manager or some other official of the 
concern. The laws of most foreign pountries re- 
quire this. 


The boxes containing the goods should be marked, 
not only with a distinguishing mark, such as a tri- 
angle or a square, which should be the same for all 
cases of the shipment, but should be also numbered 
consecutively. Upon the invoice, each box should 
appear separately with its proper number. Many 
countries require this, but it is recommended even 
when not required. The numbering makes it a 
simple matter to trace each box and to discover 
shortage. In order to facilitate the sending of cable- 
grams relating to the shipment, each invoice should 
bear its own cable code word, and at the top of the 
sheet should be indicated the cable codes in use at 
the office. 

The invoice clerk after carefully making out the 
invoice should now have it checked with the boxes, 
which may then be closed and made ready for the 

The Boxes. The boxes should be new and strong 
though not excessively so, and the boards should be 
fastened with screws rather than with nails, which 
pull out easily. It is always best to strap boxes 
carefully; this strengthens the boxes and also pre- 
vents pilfering. Many countries require that they 
be marked with a stencil which shall indicate the 
weight in kilos and pounds, and in some cases the 
name or initials of the consignee. 

The Dock Receipt. The boxes are now ready to be 
sent to the dock. The shipping clerk instructs the 


truck driver where to take them and gives him the 
shipping permit. He will also hand him another 
'blank filled out and only in need of a signature. This 
is the dock receipt. The driver takes the boxes to the 
wharf and hands the clerk at the dock both the permit 
and the receipt. The permit instructs the clerk to 
receive the goods. He inspects them in order to make 
■sure that the shipment is complete and corresponds 
with the statement in the dock receipt, after which 
he signs the dock receipt. The driver returns the 
receipt to the shipping clerk who must now procure 
the final documents. 

The Bill oj Lading (B/L). The dock receipt must 
be exchanged for an ocean hill of lading, which is not 
only a receipt but also a contract to carry goods to 
their port of destination. The bill of lading contains 
a large amount of reading matter, all of which is in- 
tended to allow the company to disclaim liability in 
all cases except negligence on its part. A number 
of copies of such bills of lading are issued. Some of 
them, usually two, are signed ; the others, sometimes 
four or five, are unsigned. The signed bills of lading 
are called negotiable bills of lading, for by means of 
them the ownership of the goods may be passed from 
person to person. All that is necessary is to indorse 
the document as if it were a check, or any other 
negotiable instrument. 

The unsigned copies, or ' non-negotiable bills of 
lading, are used for purposes of record. One may be 


sent to the consignee to show him that the shipment 
has actually taken place. 'One copy, which is left 
with the captain, who uses it to make out his list of 
shipments, the manifest, is called the captain's copy. 
Another copy may be kept in the files of the shipper 
and still another in the files of the steamship com- 

The Export Declaration. The Government requires 
that whenever a shipment Is made, whether by ship 
or by train, to some foreign country, the shipper shall 
make out an "export declaration." This declaration 
gives the name and address of the shipper, the name 
of the carrier, the name and address of the consignee, 
and a detailed description of the articles, with values 
and country of origin. This information is used by 
the customs officials to prepare the statistics of ex- 
ports. Before the customs officials will grant clear- 
ance to the vessel, the captain must produce the 
ship's manifest and also export declarations for each 
separate shipment. Steamship companies, therefore, 
frequently refuse to issue bills of lading unless such 
export declarations are produced. 

Other Documents Required. Many other docu- 
ments may be required before the shipment is ready 
to leave the United States. In the case of process 
butter and meat or meat products, a certificate of 
government inspection Is required. Where the goods 
exported contain materials previously imported and 
upon which duties have been paid, the government 


will allow a refund, or drawback, of 99 per cent of the 
amount paid. A "notice of intent" must, in such 
cases, be made out cind filed with the collector of 
customs. The claim is then investigated by the 
treasury department. 

During the weir eui "export license" was required 
for /every shipment. The license was issued by the 
War Trade Board. The main object was to save 
tonnage by eliminating unnecessary imports and ex- 
ports, and to prevent goods from reaching the enemy. 
Such restrictions are not found in peace times. 

Requirements of the Customs A uthorities. In order to 
satisfy the foreign customs service, a number of docu- 
ments must be secured. Frequently one or more bills 
of lading must be vis6d by the consul of the country of 
destination. The same official attaches his vise to the 
consular invoices and to the certificates of origin. The 
consular invoices contain substantially the same in- 
formation found in the commercial invoice. Fre- 
quently as many as six copies must be made and cer- 
tified. The consul chcu-ges a fee for this certification 
which varies according to the countries. French 
consuls charge $2.50 for consular invoices and $2.20 
for the certificate of origui. 

Disposition Made of These Documents. These docu- 
ments are now collected, clipped together, and sent 
to the foreign consignee, for without them he cannot 
receive the goods from the transportation company, 
nor satisfy the ci^stoms requirements. If the agree- 


ment was that he would pay or accept a draft upon 
the receipt of these documents, the exporter will ob- 
tain the services of a bank to make the collection. 

The draft may be discounted, or the bank may 
lend a certain amount of money on it. In order to 
make the collection certain, the documents are then 
not sent to the consignee, but are handed to the 
bank. The bank will see to it that these valuable 
documents do not pass into the hands of the con- 
signee until he has lived up to his obligations. Such 
a draft is a documentary draft. The bank will make 
certain that these documents constitute a full set, for 
if any one of the negotiable bills of lading were miss- 
ing, the value of the remaining ones would be 

Notifying the Consignee. All that remains now is to 
notify the consignee by means of a letter; this is 
called a "shipping advice." In this letter the manner 
of shipment, the manner of collecting the draft, and 
the company with which the insurance has been 
placed are indicated along with such other details as 
will give the foreign buyer all necessary information 
about his goods. 

Such letters, in fact, all communications sent to 
foreign countries, should be followed by a carbon 
copy dispatched by a later mail. Care should be 
exercised that the carbon copy actually goes by a 
later boat. The purpose is to make sure that the 
letter will reach its destination even if one boat 


Bhould meet with an accident. For the same reason, 
foreign drafts axe frequently made out in duplicate; 
in some cases as many as three or four copies are 
made out. These are called according to the number, 
the first, the second, the third, etc. In the body of 
the drafts the number of copies which have been pre- 
pared is then noted. 

The Functional Middleman. It is plain that 
making an export shipment is no simple matter. It 
requires knowledge of technical details and great 
accuracy. Exporters who do not possess the neces- 
sary information or do not want to give the time and 
attention which these shipping details demand, make 
use of freight forwarders. Meinufacturers situated 
inland also make use of these middlemen because this 
is the simplest way in which they can obtain repre- 
sentation in the port. 

The freight forwarder will attend to all shipping 
details, thereby relieving the shipper, but this- is by 
no means the only function he performs. A large 
shipment usually receives better accommodations, 
both on land and water, and the rate for each unit 
of a large shipment is, therefore, lower than on a 
small shipment traveling independently. It costs as 
much to send one pound as to send a ton, for freights 
are usually expressed in tons and steamship com- 
panies have established the custom of requiring a 
"minimum" bill of lading, which means that five or 


ten dollars, as the case may be, will be charged, no- 
matter how small the shipments. 

Consequently by combining many small shipments- 
into one large shipment, the charge per individual- 
shipment will be much less than when shipped sep-^ 
arately. Freight forwarders share part of these ad- 
vantages with their customers and are, thereforcr 
able to quote favorable rates and to give good 

In many cases the United States Government i& 
willing to refund duties paid upon foreign articles 
when they are re-exported. This refund of duties is- 
called a drawback. It is necessary to enter a claim 
for this refund at the time of re-exportation. Ex- 
porters intending to claim drawbacks find that draw- 
hack brokers who specialize in that line of work can. 
attend to these matters more efficiently than they, 
while customs brokers offer their services to all those 
who import goods, and who need assistance in meet- 
ing the requirements of the U. S. Customs Service. 

Importing. We hear much about exporting and 
how the future of the United States depends upon it. 
But importing is equally important. Without im- 
porting we would not only be forced to forego many 
necessities and many more luxuries, but our indus- 
tries would not be able to produce many things 
which now are marketed at home and abroad. 

Much of our importing is in the hands of foreign 
firms. Japanese goods are brought into this country 


by natives of Japan, while Armenian and Turkish 
rugs are imported largely by natives of those coun- 
tries. This is quite natural since such specialized 
articles require a thorough knowledge of the product 
and of the customs of the market. They are, to a 
large extent, the product of home industry and must 
be bought up by native buyers who travel from town 
to town and collect them, after which they offer the 
goods for sale to either native or foreign buyers. 
Many products find their way in this fashion into the 
channels of foreign trade. Chinese tea furnishes an 
example. It is bought from the small fcumer, sorted, 
and graded by the collector, and branded with his 
chop or trade-mark. The fact that it is difficult to 
secure uniform and reliable quality in this way is 
responsible for the decline of the Chinese tea trade. 
The English tea, raised on large plantations under 
single ownership and cured according to steindard 
methods, is uniform in quality. 

Buying Methods. As in export trade, goods are 
imported direct or indirect. Many domestic im- 
porters supply their needs through commission 
houses who place their orders in foreign countries. 
Some of these commission houses are American, 
others are foreign houses. There are also numerous 
importers who import for their own account — they 
correspond to the export merchant in export trade — 
and who supply the domestic wholesale houses and 


The United States Customs. When importing goods 
into the United States, the United States customs 
regulations must be fulfilled. Since changes in the 
tariff or changes in the interpretation of the regula- 
tions affect the amount of the import duty, goods are 
sometimes sold before importation subject to changes 
in the tariff. This protects the importer. 

It is important to know what documents are re- 
quired and how goods are cleared through the custom- 
house. Usually three consular invoices are required. 
They must contain a description of the goods, their 
value at the port of exit, expressed in the currency of 
the exporting country. 

In the case of American goods re-imported, a 
special form of consular invoice is needed; a re- 
importation certificate. In addition to this, there are 
many special documents required in the case of arti- 
cles like hides, food, and drug products. 

A number of a,rticles may be imported "in bond." 
This means that no duty need be paid as long as the 
goods remain in a specified place, usually a bonded 
warehouse. Should the owner desire to remove them 
from this warehouse, then he must first pay duty. 
All other goods are subject to a cash entry, i. e., the 
owner declares that he is prepared to pay duty im- 
mediately. The first step is, therefore, to determine 
the amount of the duty. The duty is based upon the 
value and quantity of the goods. Information in re- 
gard to these facts is contained in the consular in- 


voice. The appraiser at the port of entry, however, 
determines whether this declaration is in accordance 
with the facts and when he discovers that the de- 
clared valuation is less than the appraised, an addi- 
tional duty of I per cent of the appraised value is 
levied for every i per cent by which the value was 
understated. An understatement of 75 per cent op 
more is considered a fraudulent entry, and is punish- 
able by heavy fine, confiscation of goods, £ind im- 

This appraisal takes time. In order to expedite 
the passing of the goods into the hands of the owner, 
the customs officials may retain a, small portion of 
the goods, never less than 10 per cent, and allow the 
bulk to be taken away after a deposit has been made 
large enough to make certain that the duties will be 
paid. After the amount of the duties has been deter- 
mined, a delivery permit is issued as a receipt for 
the payment of the duties and the goods are released. 

How the Appraisals Are Standardized. Opinions of 
persons in regard to the "true market value" of an 
article differ, and such differences may lead to dis- 
putes in regard to the duties to be paid. For this 
reason an importer who disagrees with a judgment 
rendered by the appraiser may appeal to the United 
States Board of General Appraisers jmd to the United 
States Customs Court of Appeals. Many trades 
have prepared samples of tjie most common grades 
of their importations in order to facilitate the' work 


of the appraisers. The Comparative Value Report 
Bureau acts as a clearing house for this information 
and aids in securing more uniform methods of ap- 
praisal at the various ports of entry. Notwithstand- 
ing these safeguards, certain ports of entry are known 
to be more lenient and lax than others in their appli- 
cation of customs regulations, and importers through 
other ports are, therefore, somewhat under a dis- 
advantage. It is impossible to bring absolute uni- 
formity in the application of a system so involved 
and detailed as the United States Tariff. 

Summary. When an order has been received it is 
passed, first of all, to the credit man, after which it 
reaches the order clerk, who proceeds to fill it. The 
shipping clerk secures freight space, and looks after 
the insurance. The invoice clerk makes out the in- 
voice and checks it with the goods and with the order. 
The goods are taken to the wharf where the shipping 
permit is exchanged for the dock receipt which in 
turn is exchanged for the bill of lading. 

The documents required are: the export declara- 
tion, the certificate of origin, and the consular invoice 
or invoices. The documents are pinned to the draft 
as it is taken to the bank to be discounted. 

Importing is of equal importance. Much import- 
ing is in the hands of foreigners. Importing may 
take place direct and indirect. The United States 
Customs regulations require three consular invoices. 
Goods may be imported in bond. If goods are en- 


tered for consumption a cash entry is made and duty 
is paid immediately. The goods are appraised by a 
government appraiser. It is difficult to secure uni- 
formity in these appraisals. 


See references of preceding chapter. 


1. What information should the salesman send in to 
the home office? 

Reference: de Haas. Foreign Trade and Shipping. 
Part I, Chapter IX. 

2. What is the meaning of a clean bill of lading? 
Reference: de Haas. Part II, Chapter H. 

3. What different kinds of tons are used in describing 

Reference: de Haas. Part II, Chapter I. 


1. Trace an order through the export department. 

2. What is a charter-party? 

3. What is an open policy of marine insurance? 

4. What information should be contained in an in- 
voice and how should it be checked? 

5. Enumerate the documents that must be secured to 
make a shipment, beginning with the engaging of freight 
space until the goods are on their way to the foreign 


6. What different middlemen have been mentioned 
and of what does their work consist? 

7. What is meant by a re-importation certificate, a 
notice of intent, a cash entry?